On 23 August 2018 the UK Government published a technical notice (the “Notice”) describing what it is doing to prepare for a “no deal” Brexit in the financial services sector.
Among other things, the Notice sets out the UK Government’s commitment to avoiding cliff edge effects for financial services providers in the UK by permitting EEA firms to continue operating in the UK for a temporary period post-Brexit pursuant to temporary permissions and recognition regimes. The terms of the Notice will be welcomed by EEA firms which wish to continue to sell in-scope products or provide in-scope financial services to UK customers post-Brexit.
The Notice is part of a series of Technical Notices being published by the UK Government in order to allow UK businesses and citizens to understand what they would need to do in a no deal scenario, so that they can make informed plans and preparations. Nevertheless, the Notice states that such a scenario “remains unlikely given the mutual interests of the UK and the EU in securing a negotiated outcome” and the Notice specifically states that at this stage, firms should continue to plan on the basis that an implementation period will be in place from March 2019 to December 2020 and continue to follow guidance from the regulators. You may access the Notice (here).
The Temporary Permissions Regime
In the event of a no deal Brexit, the Temporary Permissions Regime (“TPR”) will allow EEA firms currently passporting into the UK to continue operating in the UK for up to three years after exit while they apply for full authorisation from UK regulators.
The UK Government published draft legislation providing for the TPR on 24 July 2018, in the form of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. While this legislation does not cover EEA payment institutions, electronic issuers and EEA funds that are marketed in the UK, according to the Notice, similar TPRs will be introduced for these entities.
As set out under the draft legislation, in order to benefit from the TPR, firms will need to notify/apply to the relevant UK regulator. According to the FCA, this will be an online process and it expects to open the notification window in early January 2019.
The Temporary Recognition Regime for CCPs
The UK Government intends to establish a Temporary Recognition Regime (“TRR”) for Central Counterparties (“CCPs”) to allow non-UK CCPs to continue to provide clearing services to UK firms for a period of three years while those CCPs apply for recognition in the UK.
The contours of the TRR for CCPs are set out in the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
In order to enter the TRR, non-UK CCPs will need to notify the Bank of England before exit day of their intention to provide clearing services in the UK.
According to the Notice, the UK Government will also bring forward legislation to deliver transitional arrangements for central securities depositories, credit rating agencies, trade repositories, data reporting service providers, systems currently under the Settlement Finality Directive and depositaries for authorised funds.
Impact of No-Deal Brexit for UK-Based Customers of EEA firms operating in the UK
For UK-based customers who access banking, insurance, investment funds and other financial services with EEA firms currently passporting into the UK, the TPR will enable these firms to continue to provide those services to UK customers for up to three years after exit. This will allow time for these firms to apply for authorisation to continue operating in the UK. If they receive authorisation covering the full scope of the services that they currently provide, then they will be able to continue to provide services as before. This is critical since it addresses concerns that the UK might, for example, have prohibited EEA domiciled funds from continuing to be sold to UK customers; this would have been a significant problem for those funds and their managers, many of which are based in the UK.
Impact of No Deal on EEA customers (including UK citizens living abroad) of UK firms operating in the EEA
In the absence of action from the EU, EEA-based customers of UK firms currently passporting into the EEA, including UK citizens living in the EEA, may lose their ability to access financial services currently available to them from such firms, due to those firms losing their rights to passport into the EEA. UK firms’ ability to perform contracts in place at the time of exit may also be affected, depending on the nature of the contract.
EEA Funds - Delegation of Portfolio Management to UK Managers
EU legislation allows fund management companies to delegate portfolio management services to a third party manager in another country, including countries outside the EEA subject to there being in place a cooperation agreement between the supervisory authorities in the relevant EEA member state and the domicile of the third country manager. The UK authorities are ready to agree cooperation arrangements with their EEA counterparts as soon as is possible.
The Notice also sets out other preparations being made by the UK Government for a no deal Brexit. These include:
- ensuring that contractual obligations (such as under insurance contracts) between EEA firms and UK-based customers that are not covered by the TPR can continue to be met;
- aligning payments legislation to maximise the likelihood of the UK remaining a member of the Single European Payments Area (SEPA), which enables banks to execute cross-border transfers in other SEPA member countries in equivalent conditions to domestic transfers;
- treating prospectuses that are valid in the UK before exit (including those approved by a competent authority in a different EU member state) as valid for the remainder of the 12 months from their date of approval; and
- adopting legislation to ensure the continuation of settlement finality protections provided under the Settlement Finality Directive, which protect certain payments and transfers of securities made by EU participants in case such participants become insolvent.
The temporary permissions and recognition regimes should offer comfort to EEA firms and investment funds passporting into the UK market that they will continue to have access to the UK in the event of a no-deal Brexit for the 3 year period following Brexit. However, it appears that these regimes will differ from the existing passporting arrangements to some degree.
It was always hoped that the UK’s ability to restrict EEA firms and investment funds from accessing UK customers post-Brexit would not become a bargaining tool in the political negotiations. The unilateral establishment of a temporary permissions and recognitions regime by the UK in the event of a no deal Brexit is, therefore, to be welcomed, given the significant market instability and adverse impact on consumers that such a restriction would cause. However, significant concerns remain in terms of the impact of a no deal Brexit on EEA customers of UK firms.