Although the UK left the EU at midnight (11pm BST) on 31 January 2020, the terms of the withdrawal agreement between the UK and the EU provided for a transition period until midnight (11pm BST) on 31 December 2020 (Exit Day). In the absence of a deal, EU financial institutions will lose the right to passport their activities and services into the UK under the relevant EU single market directive after Exit Day. Nevertheless, the UK will remain very much open for business and EU financial institutions, along with their counterparts in other parts of the world, may be able to access the UK market without the need to be licensed in the UK on the basis of the overseas persons exclusion (OPE).

In addition, certain EU financial institutions may be able to benefit from the UK temporary permission regime for a period post-Exit Day. Please see our previous alert for further details.

This Alert provides a high level summary of the OPE.

Overseas persons exclusion

The General Prohibition

Section 19 of the Financial Services and Markets Act 2000 (FSMA) prohibits a person from carrying on (or purporting to carry on) any “regulated activity” in the UK (as defined in the FSMA (Regulated Activities) Order 2001) by way of business, unless that person is authorised or exempt, or an exclusion applies (the General Prohibition).

A breach of the General Prohibition may: (a) be a criminal offence punishable by imprisonment; (b) result in the imposition of a fine; and/or (c) render the agreement entered into in relation to the regulated activity with another party unenforceable.

The OPE provides an exclusion from the General Prohibition.

Application of the OPE to regulated activities

Broadly speaking, the OPE applies to the following regulated activities:

  • dealing in investments as principal (e.g., own account dealing, including acting in a matched principal capacity);
  • dealing in investments as agent;
  • advising on investments;
  • arranging deals in investments;
  • operating a multilateral trading facility or organised trading facility;
  • arranging regulated mortgage contracts (RMC), regulated home reversion plans (RHRP), regulated home purchase plans (RHPP), or regulated sale and rent back agreements (RSRB);
  • entering into or administering an RMC, RHRP, RHPP or RSRB; and
  • agreeing to carry on regulated activities

The OPE does not apply to deposit-taking, investment management, custody and most insurance based activities. However, depending on the specific facts, it may be possible to argue that the activities in question are not carried out in the UK based on the characteristic performance test. For example, the UK normally takes the view that deposit-taking is carried out where the account is based and investment management is carried out in the location in which the manager exercises discretion. In contrast, investment advice is deemed to take place where the advice is received. Therefore, an analysis of where the regulated activities are performed will be required in each case to determine whether the activity is carried on in the UK.

For completeness, reliance on the OPE is not necessary for activities that are not regulated in the UK such as certain commercial lending.

Criteria for OPE qualification

In order to benefit from the OPE, the financial institution in question must qualify as an “overseas person”, which means a person who carries on a regulated activity but who does not do so, or offer to do so, from a “permanent place of business maintained by him in the UK”, and complies with certain other criteria.

Broadly speaking, the term ‘permanent place of business maintained in the UK’ is generally understood to exclude: (a) business carried on from a temporary place of business (e.g., marketing at an industry conference); and (b) one-off transactions conducted from UK premises (e.g., from the offices of a UK subsidiary or affiliate).

The other criteria that need to be satisfied will depend on the activities being performed. For example, in relation to the regulated activity of dealing in investments as principal, the OPE may be available if the overseas person:

enters into an investment transaction with or through a UK authorised person, such as a UK bank or a UK regulated investment firm; or the investment transaction arises as a result of a “legitimate approach” that:

(i) is made to the overseas person by a UK client who has not been solicited by the overseas person in any way (e.g., reverse solicitation); or

(ii) has been solicited by or on behalf of the overseas person in a way that complies with the UK financial promotion rules (e.g., where the marketing or communication: (a) is directed at or made to UK investment professionals, sophisticated investors or high net worth companies or individuals in accordance with the applicable financial promotion restriction exclusion; or (b) has been approved by a UK regulated firm).

This will require financial institutions to conduct an analysis of all of their activities against the relevant criteria to determine if the OPE is applicable.

Conclusion

Although the future relationship between the UK and the EU after Exit Day remains unclear, the UK is still very much open for business. Whilst the OPE does not provide access to the UK financial markets for all client types or for all regulated activities, it does reflect the UK’s commitment to open wholesale financial markets. 

As a consequence, overseas financial institutions, whether in the EU or in any other part of the world, may be able to access the UK wholesale financial markets the OPE. Where the OPE is not available, financial institutions may be able to take the benefit of some other exclusion. 

Criteria for OPE qualification

In order to benefit from the OPE, the financial institution in question must qualify as an “overseas person”, which means a person who carries on a regulated activity but who does not do so, or offer to do so, from a “permanent place of business maintained by him in the UK”, and complies with certain other criteria.

Broadly speaking, the term ‘permanent place of business maintained in the UK’ is generally understood to exclude: (a) business carried on from a temporary place of business (e.g., marketing at an industry conference); and (b) one-off transactions conducted from UK premises (e.g., from the offices of a UK subsidiary or affiliate).

The other criteria that need to be satisfied will depend on the activities being performed. For example, in relation to the regulated activity of dealing in investments as principal, the OPE may be available if the overseas person:

enters into an investment transaction with or through a UK authorised person, such as a UK bank or a UK regulated investment firm; or the investment transaction arises as a result of a “legitimate approach” that:

(i) is made to the overseas person by a UK client who has not been solicited by the overseas person in any way (e.g., reverse solicitation); or

(ii) has been solicited by or on behalf of the overseas person in a way that complies with the UK financial promotion rules (e.g., where the marketing or communication: (a) is directed at or made to UK investment professionals, sophisticated investors or high net worth companies or individuals in accordance with the applicable financial promotion restriction exclusion; or (b) has been approved by a UK regulated firm).

This will require financial institutions to conduct an analysis of all of their activities against the relevant criteria to determine if the OPE is applicable.

Conclusion

Although the future relationship between the UK and the EU after Exit Day remains unclear, the UK is still very much open for business. Whilst the OPE does not provide access to the UK financial markets for all client types or for all regulated activities, it does reflect the UK’s commitment to open wholesale financial markets. 

As a consequence, overseas financial institutions, whether in the EU or in any other part of the world, may be able to access the UK wholesale financial markets the OPE. Where the OPE is not available, financial institutions may be able to take the benefit of some other exclusion.