A discussion of the FCA's Consultation Paper on changes to the Handbook to reflect updates to law in the event of a no-deal Brexit.
The Financial Conduct Authority (FCA) has now shown its opening hand as it steps up its preparations for a no-deal Brexit scenario by publishing Consultation Paper CP18/28 on 10 October. In it the FCA sets out in 781 pages how it intends to use the powers granted to it (and the PRA, Bank of England and Payment Systems Regulator) to make changes to the Handbook and the existing EU Binding Technical Standards (BTS).
What are the proposed key changes to the Handbook?
The content of the CP is wide ranging and many of the proposed changes to the Handbook and BTS are simply to update the terminology that refers to EU/EEA entities and institutions. There are, however, a number of proposed key changes to the UK legal and regulatory framework for fund management after 29 March 2019 in the event that no negotiated deal is reached for the UK’s withdrawal and, therefore, the proposed transition period falls away. These are:
- The creation of an equivalent UK AIFM regime for existing alternative investment funds managed by UK AIFMs and for AIFMs who may wish to launch new funds.
- Confirmation that cross-border management will be permitted for EEA AIFMs managing unauthorised UK AIFs without carrying on a regulated activity and will be subject to the same rules as third country AIFMs (albeit it won’t be possible for an EEA AIFM to manage an authorised UK AIF save as permitted by the Temporary Permissions Regime (TPR).
- Confirmation that the continued cross-border marketing of EEA AIFs in the UK will be subject to the UK’s National Private Placement Regime unless the AIFM has already notified the FCA of its intention to begin marketing before exit day and has applied to enter the TPR.
- The creation of an equivalent UK retail fund regime for existing UK UCITS schemes and for UK management companies who wish to launch new funds of this kind in the UK (outside of the TPR EEA management companies will no longer be able to manage UK UCITS).
- Confirmation that EEA UCITS wishing to continue to market in the UK will be treated as third-country funds and will need to apply for individual recognition by the FCA under s.272 FSMA (although passporting firms already recognised before exit day will be able to enter to TPR).
- The discontinuance of the UCITS cross-border mergers procedure.
- provisions for master-feeder arrangements which will still apply to a UK feeder UCITS investing in units of an EEA master UCITS. (The FCA does not expect that EEA UCITS feeder funds will be allowed to invest in a UK UCITS master fund after exit day.)
In a number of other areas the FCA is seeking to use its discretion in order to ensure the continued smooth running of the market and to protect investors. For example, it is proposed that UK UCITS should still be able to access EEA-based investments under the investment and borrowing powers rules in COLL 5.2, rather than treating EEA investments as third country investments - which could interrupt investment plans and limit the availability of alternative options for both existing and new investors.
What happens next?
The consultation process runs until 7 December and we would strongly urge firms to familiarise themselves with the proposals, even if they do not intend to comment on them at this stage, as the final amendments to the Handbook are likely to resemble much of what is contained in this CP – unless of course a deal is negotiated on the future relationship between the UK and the EU.