With Brexit fast approaching, firms which have passports under Schedule 3 to Financial Services and Markets Act 2000 (‘inbound passporting EEA firms’) are making final preparations for the post-Brexit regulatory requirements. A key area of challenge remains compliance with the regulatory reporting requirements, with some fundamental changes on the horizon with respect to the reporting rules for inbound passporting EEA firms, in the event the UK leaves the EU without an agreement or implementation period (a ‘no-deal Brexit’ scenario).
While the HM Treasury has put forward legislation to provide the financial services regulators with a power to phase in post-exit requirements to allow flexibility for firms to transition to a fully domestic UK regulatory framework in the event of a no-deal Brexit, the FCA does not consider granting transitional relief in certain areas would be consistent with its statutory objectives. Therefore, it expects firms to comply with these requirements from 31 October 2019 (‘exit day’).
For instance, as a result of Brexit, the UK’s transaction reporting regime under MiFID II will change, including connected obligations such as the requirement to submit financial reference data. In the event of a no-deal Brexit, this requirement will apply from exit day to the EEA firms entering the temporary permissions regime (TPR), as well as UK-approved reporting mechanisms (ARMs) that submit transaction reports on behalf of firms with respect to instruments traded on venues in the EU27 and the UK.
On exit day, the European Securities and Markets Authority’s (ESMA) Financial Instruments Reference Data System (FIRDS) will be replaced by a similar FCA system and the FCA will switch off its feeds to ESMA FIRDS.
Given the scale, complexity and magnitude of Brexit, the FCA is not expected to take enforcement action against firms that fail to meet all their regulatory requirements straight away. But firms should begin preparations to either connect directly to the FCA’s Market Data Processor (MDP), or use an Approved Reporting Mechanism (ARM) to be able to transaction report to the FCA by exit day.
The good news is that the FCA FIRDS has been built on the new ESMA schema, which should help firms experience a smooth transition into the new reporting regime.
Aiming to achieve as smooth a transition as possible in the event of a no-deal Brexit, the FCA has already changed some fields or the reporting logic to improve firms’ experience of the system without deviating from ESMA’s approach. Given the schema for the two systems will be identical, with the exception of the Relevant Competent Authority, which will no longer be relevant, and the FCA FIRDS Master Data, which is likely to be different from that of ESMA, firms used to transaction reporting in the UK will see very little change to the underlying mechanics of reporting or the reporting logic, with the origin of the feedback files remaining largely unchanged.
However, firms will need to make sure their current ARM is planning to make use of the temporary authorisation regime for EEA data reporting service providers, to remain connected to the FCA’s Market Data Processor on exit day. Firms will also be expected to take reasonable steps to comply with their requirements to submit instrument reference data from exit day. This means that they will need to have access to the FCA FIRDS either directly or via a third party to meet their transaction reporting obligations.
The industry test environment of the FCA’s FIRDS is already open for testing purposes before Brexit, and the FCA has begun feeding its FIRDS with live production data to ensure that it has a full database of instruments by exit day. The system currently has a one-way connection, i.e. data will flow into FCA FIRDS, but it will not generate feedback to firms. Still, this will allow daily trading venue instrument reference data files to be delivered and processed by ESMA. So, if they haven’t already done so, firms would be well-advised to start testing the FCA FIRDS’s publishing solution by downloading full and delta reference files and submitting their data.
In addition to MiFID II transaction reporting obligations, inbound EEA firms with a UK branch should also take into account other reporting obligations. For instance, to ensure oversight of derivative markets and effective monitoring of systemic risk, the FCA will require all firms who enter into derivatives transactions in scope of EMIR to report into a UK-registered trade repository from exit day.
Similarly, to enhance market integrity and protect consumers, the FCA will also require EEA entities that have securities admitted to trading or traded on UK markets to submit information to the FCA and disclose certain information to the market from exit day to ensure the effective functioning of markets.
The FCA will not grant any transitional relief in any of these areas, so firms should ensure they remain in compliance with these changes to their regulatory obligations on exit day by undertaking the necessary steps. In particular, firms will be expected to document evidence that they have taken reasonable steps to prepare to meet the new obligations by exit day and that they have built the capacity to back-report missing, incomplete or inaccurate transaction reports.
The FCA considers firms to be best placed to understand their own needs and requirements. For some firms, there may be other circumstances in which actions will be needed. Therefore, firms would be well advised to consider whether, in the light of their own specific business model and operations, there are any further actions to undertake with respect to their reporting requirements.
Mete Feridun is a Manager in PwC’s Financial Services Risk and Regulation practice. Prior to joining PwC, he worked at the Financial Conduct Authority. The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official views and opinions of PwC.