With Britain’s exit from the EU fast approaching (March 2019), we look at the regulator’s position on Brexit, the implications for UK firms with EEA clients and EEA incoming firms with UK clients, and how firms should be planning ahead for exit day.
FCA focus on Brexit
The FCA has dedicated a high level of resource to planning for Brexit and is aware of the impact Brexit is going to have on financial services regulation generally and on regulated firms.
The EU (Withdrawal) Bill will convert existing EU legislation into UK law and preserve existing UK laws which implement EU obligations. The FCA is currently reviewing the FCA Handbook of Rules and Guidance to see where changes may be required in light of the legislative changes.
The FCA recognises that firms that rely on passporting rights will not be able to carry on their business in order to meet their contractual obligations until they gain authorisation for the state in which they are undertaking such cross-border /branch business or by using a passport granted by another member state in which they are authorised. The FCA sees this as a particular concern for insurance business (the ability to pay claims and receive premiums from policyholders on a cross-border basis) and for cross-border derivative products.
These risks affect both the UK and the EU. The FCA envisages that during the transition or implementation period, a solution will be found so as to reduce the risks to financial stability. One of the best ways to mitigate these risks would be an agreement with the EU to allow existing contracts to continue in force.
The UK government has said it will legislate if necessary to allow European counterparties to service contracts with UK entities after Brexit; however, no reciprocal agreement from EU authorities has been made as yet. Any such agreement relies on a formal agreement and the adoption of a transition or implementation period.
EEA firms with a UK branch or which offer cross-border services into the UK
The UK government has made a commitment to allow EEA firms to continue to operate and service contracts by granting temporary permissions for firms (such as with the consumer credit interim permission regime when the FCA took over supervision from the Office of Fair Trading). Such firms will need to notify the FCA if they intend to use such a temporary permission before exit day.
The FCA are carrying out a survey of EEA firms that passport into the UK or which market funds in the UK which is intended to help the FCA design the temporary permissions scheme. This survey closes on 11 May.
UK firms with an EEA branch or which offer cross-border services into the EEA
The FCA is advising UK firms that service clients in the EEA to continue to prepare for a range of scenarios. Such firms should discuss these arrangements and the implications of a transition period with the relevant EU regulator in the state(s) in which they do business. EU regulators (including the CSSF in Luxembourg, BaFIN in Germany, the French AMF and the Central Bank of Ireland) are in active discussions with UK firms looking at setting up a subsidiary in their respective states so as to continue to offer services to EEA clients. The key issue for firms will be how much of the business needs to move to that subsidiary and how much can be outsourced back to the UK so as to satisfy the regulator that the business is being operated from that location and therefore that it can be appropriately supervised and when such relocation is required (ie before March 2019 or, if the regulators come to an agreement, during a transition period). Firms should also bear in mind how long the authorisation process will take in the jurisdiction so as to ensure it has the required permissions in place in time for March 2019 if a transition period is not agreed.
Last year the European Securities and Markets Authority (ESMA) set up a forum, the Supervisory Coordination Network, to allow national regulators to discuss cases involving UK entities looking to relocate to Europe. ESMA wants to ensure that such UK firms that move any part of their business from the UK do not base that decision on the prospect of a national regulator enforcing less-strict standards than a supervisor in another country. National regulators are therefore mindful to avoid the creation of mere letterbox entities in their jurisdiction so it will be important to discuss with the regulators what operations can be delegated back to the UK.
There is a lot of work still to be done to agree a transition period; we would advise UK firms wishing to continue to service EEA clients from March 2019 to initiate discussions as soon as possible with EU regulators if they have not already done so.