In March 2018, the UK and the EU reached an agreement on the terms of an implementation period following the UK’s withdrawal from the EU (Brexit). But in the case of a ‘no-deal Brexit’, ie, if there is no deal for a transition or an implementation period in place when the UK withdraws from the EU, the UK will become a ‘third-country’ in relation to the EU. This means that EEA financial services firms and investment funds currently operating through a passport in the UK under the existing European passport framework will no longer be able to passport into the UK and will need to seek authorisation to continue to access the UK financial markets.
If this happens to be the case and the passporting regime falls away abruptly, the Temporary Permissions Regime (TPR) will come into force for a maximum of three years within which time EEA financial services firms and investment funds which passport into the UK will be required to obtain authorisation in the UK. This means that it will provide a backstop to ensure inbound EEA firms and investment funds can continue their business with minimal disruption, allowing them to continue operating in the UK within the scope of their current permissions for a limited period after exit day, while seeking full UK authorisation.
While TPR has been designed to allow EEA financial services firms and investment funds using Freedom of Establishment (FOE) or Freedom of Services (FOS) passporting to operate for a limited period while they seek authorisation from the regulators, there remains uncertainty within the industry as to how the post-Brexit regime will apply. This blog is intended to highlight some of the key regulatory rules and procedures that these firms should take into account in their Brexit preparations.
While banks which enter the temporary permissions regime will have a Part 4A permission under Financial Services and Markets Act, they must already be authorised to carry on a regulated activity in the UK under the EU passporting regime at the point of exit to be eligible for entry into the TPR. The regulators refer to this as a ‘deemed Part 4A permission’ which means that inbound firms will continue to be an authorised person for the purpose of UK law while their permission will cover only those activities that the firm was permitted to carry on in the UK via passporting immediately before exit day. This means that those firms in TPR planning to undertake further regulated activities beyond the scope of their deemed Part 4A permission will need to submit a separate Variation of Permission (VoP) application to obtain permission from the regulators. Firms with a deemed Part 4A permission will be allowed to carry on those activities in the scope of their pre-Brexit passporting permission for a maximum of three years, subject to the discretion of the HM Treasury’s to extend the duration of the regime by increments of twelve months.
The legislation does not enable inbound EEA firms that have not applied for Part 4A authorisation or notified the regulators to enter the TPR automatically. So firms currently passporting into the UK will need to notify the regulators to be deemed to have permission. The only exception are those EEA passporting firms that submitted a branch application prior to the TPR SI being made, which will automatically enterinto the TPR. Firms are required to notify the regulators of their intention to enter into the regime or by submitting a Part 4A permission application before exit day for authorisation as a branch. Recently, in response to the delay to Brexit, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have extended their notification window for firms that wish to enter into the TPR. Firms that currently passport into the UK and have a top-up permission will also need to inform the regulators that they wish to enter the TPR to ensure that the part of their permission that relies on passporting continues. So the procedure for them to follow is the same approach as other firms that wish to enter the TPR.
Those firms whose Part 4A authorisation application is rejected or decide not to enter the TPR will be expected to run-off their existing UK regulated activity and will be placed in the Financial Services Contracts Regime (FSCR) regime to allow them to wind down their UK businesses in an orderly manner. Under this regime, the Supervised Run-Off (SRO) and Contractual Run-off (CRO) mechanisms have been put in place. These mechanisms are intended to serve as a back-stop to TPR by allowing firms outside TPR to continue servicing their pre-existing contracts for a limited period after Brexit. There is no application or notification process to enter FSCR. So inbound EEA firms that were passporting into the UK prior to exit day and do not enter the TPR will enter the regime automatically on exit day and will be able to continue servicing their contracts.
If the UK-EU transitional deal takes effect, there will be a transitional period operating from exit day until the end of December 2020. During this time, EU law would remain applicable in the UK as per the overall Brexit agreement. In this case, firms and funds would continue to benefit from passporting between the UK and the EEA as before.
The EEA firms currently passporting into the UK will see significant changes in their regulatory requirements including changes related to the Senior Managers and Certification Regime (SM&CR) and the Financial Services Compensation Scheme (FSCS), as well as a regulatory reporting requirements. These firms currently benefit from lighter regulatory reporting obligations compared to branches of non-EEA headquartered firms. In the absence of a Brexit deal this distinction will not be relevant and all firms will be required to comply with all of the regulatory requirements relevant to non-EEA branches from the point they enter into the TPR, with the exception of certain requirements which will be phased in. Firms should not consider this a simple compliance exercise and should start preparing now taking into account the tightness of timescales and lack of room for any contingencies.
Mete Feridun is Manager, Financial Services Risk and Regulation, PwC United Kingdom. Opinions expressed here are his own. He was a visiting researcher at Faculty of Law, University of Oxford last year (while employed at the FCA).