On 10 October 2018, the FCA consulted on the Temporary Permissions Regime (TPR) which will, once the UK leaves the EU, apply to firms which are currently passporting into the UK. Firms have until 7 December 2018 to provide feedback on the consultation.
Why is the TPR being introduced?
Without the introduction of the TPR, EEA firms which passport into the UK (either on a branch basis or a cross-border basis) would lose their rights to do business in the UK once the UK leaves the EU. It is therefore a measure which is being introduced to minimise the disruption to UK consumers and firms which rely on having the ability to passport into the UK.
When and for what period will the TPR take effect?
The UK is due to leave the EU on 29 March 2019. However, negotiations between the UK and EU are ongoing and the subject of some of these negotiations concerns an implementation period during which EU law will continue to apply in the UK. The TPR has been introduced to deal with the worst-case scenario that no implementation period is agreed upon (otherwise it will not come into force).
Once introduced, the TPR will run for a period of approximately three years (the exact period depending upon when firms are asked by the FCA to make an application for full authorisation).
Which firms can take advantage of the TPR?
Most firms which currently rely on the passporting regime will be able to take advantage of the TPR. This includes firms passporting under a single market directive and also firms which can passport into the UK under Payment Services Directive 2 and the Electronic Money Regulations 2. Firms are required to notify the FCA that they need to rely on the TPR (the FCA expects the notification window to begin in early 2019 and close on 29 March 2019).
What happens once the TPR comes to an end?
The intention is that during the period in which the TPR is in effect, firms relying on the TPR will seek full authorisation under the UK regime (in the same way that a US firm would seek authorisation to do business in the UK). If a firm does not obtain such authorisation they will need to stop doing business in the UK (in so far as they are, under UK law, considered to be doing business in the UK).
What are the implications for firms subject to the TPR?
If introduced, the TPR will have significant implications for firms which are currently passporting into the UK. In order to explain why this is the case, it is important to understand how the passporting regime currently functions under EU law. Although there is not a harmonised approach to passporting (it being governed by the relevant EU directive), the general approach is that the regulator (known as the home state regulator) of the country in which the firm is based authorises that firm and supervises most of its activities whereas the FCA will take a more limited role by only supervising limited aspects of the firm's conduct.
In contrast, under the TPR as the FCA is currently proposing it, the FCA will assume the regulatory responsibilities of the home state regulator. This means that where the directive grants the home state regulator a power to supervise some aspect of a firm's activities which is passporting into the UK, the FCA will assume this responsibility under the TPR. The FCA is therefore assuming a greater regulatory responsibility for these firms.
The FCA is consulting as to exactly what this will mean for these firms. It has proposed that firms subject to the TPR will, for example, be covered by the FSCS (and therefore be required to pay the relevant levy to fund this), will be subject to the jurisdiction of the FOS (currently only firms with an establishment passport are subject to its jurisdiction) and will have to comply with additional rules in the FCA Handbook (for example, for investment services, additional rules relating to Client Assets will apply and all but one of Principles for Business will now apply). On the other hand, it proposes that the certain parts of the current regime will continue to apply to TPR firms (for example, the reduced obligations which apply to EEA firms under the Senior Managers and Certification Regime will continue to apply to TPR firms as opposed to the more onerous requirements applying to firms from third countries e.g. US firms.).
Importantly, the FCA has stated that it will accept 'substituted compliance' i.e. if TPR firms can show that they are complying with their home state rules this will be accepted as evidence of compliance with the FCA's rules. Due to the harmonisation at the EU level, this should somewhat lessen the burden of TPR firms having to comply with the new rules – most such firms should already be substantively complying with these rules in their home state, however there will be differences in the UK approach to regulation and supervision.