The financial services industry is often referred to as the jewel in the crown of the UK, but as the possibility of a “no-deal” draws ever closer, what measures are being put in place to ensure that the financial services industry doesn’t lose its sparkle?
Currently, under the EU passporting regime, financial services firms in any EEA Member State that are subject to certain EU directives (such as MIFID II, UCITS and AIFMD) have access to the single market for financial services. This means that they can either set up branches, or provide financial services within the remit of the passporting provisions of the relevant directives without requiring further authorisation.
Following the UK’s planned exit from the EU on 29 March 2019, provided that the terms of the Withdrawal and Transition Agreement can be agreed, EU law and consumer rights and protections will continue to apply in the UK during the implementation period set to start on 29 March and end on 31 December 2020. During this time, UK firms and investment funds will continue to have the benefit of the EU passporting arrangements.
However, following the delay of the Commons vote in early December last year, the possibility that the Withdrawal and Transition Agreement will not be agreed in time is becoming more real and a number of draft statutory instruments (SIs) were published early last October under the powers in the EU Withdrawal Act 2018. Subject to changes, they are due to take effect on 29 March if the UK and EU are unable to conclude a Withdrawal and Transition Agreement.
The SIs do not make any policy changes and are designed to enable inbound firms and investment funds to continue their activities in the UK for a limited period of time after Brexit by creating a temporary permissions regime (TPR) in order to minimise the risk associated with an abrupt loss of the passporting rights.
The TPR will have the effect of temporarily authorising the incoming firm or investment fund to undertake the regulated activities (usually covered by its passport) in the UK as if it were authorised in the UK. It is intended that the TPR will last for a maximum of three years, however the period will vary from firm to firm depending on when they are asked to submit their application for full authorisation in the UK (and therefore leave the TPR).
We envisage that the TPR will operate in much the same way as the temporary regime that was implemented when the FCA took over regulation of consumer credit from the Offce of Fair Trading (OFT). For example, once in the TPR, the firm or investment fund will be given a three month “landing slot” within which to submit an application for authorisation.
One point to note is that in order to benefit from the TPR, EEA firms and investment funds will need to notify the FCA (or the Prudential Regulatory Authority (PRA), in respect of dual authorised firms) of their intention to use the TPR. This will be an online process and it is expected that the notification window will open in this month. Once the notification window closes, firms and investment funds that have not notified the UK regulator of their intention to use the TPR will not be able to do so.
The FCA has consulted on the proposed TPR, however the consultation period was only eight weeks long to ensure that there was suffcient time to incorporate comments from the financial services industry. The consultation period closed on 7 December and feedback is expected early this year, with final versions of the SIs to be published shortly before 29 March.
Whilst measures are being put in place by the UK in relation to EEA firms and investment funds looking to market in the UK, what is not clear is whether our conciliatory approach will be reciprocated by the EU. To date no measures for how UK firms and investment funds will be able to provide financial services in the EU have been announced and it remains to be seen how favourable any proposed measures (if any) will be.
For those EEA firms and investment funds that are currently relying on the passporting regime to provide services or to market to investors in the UK, we would recommend that you put your notification in to use the TPR as soon as possible. For UK firms and investment funds, in the absence of any further guidance from the EU, you should continue to work on your contingency plans whilst we wait to see what the future holds.