UK FCA announces Temporary Permissions Regime for inbound passporting EEA firms and funds in the event of a 'no deal' Brexit
The United Kingdom Financial Conduct Authority (FCA) has set out its approach for 'inbound' European Economic Area (EEA) firms and funds in the event of a 'no deal' Brexit. A Temporary Permissions Regime is proposed for firms and funds authorised in an EEA country and currently providing investment services or marketing funds to UK customers through a UK branch or on a cross-border basis under EEA passporting arrangements. The stated intention is to allow such inbound firms to continue operating in the UK within the scope of their current passports for up to three years after a 'no deal' Brexit while they apply for full (permanent) UK authorisation. It also paves the way for funds with a passport to continue temporarily marketing in the UK.
Temporary Permissions Regime
Under proposals published by the FCA, in the event of a ‘no deal’ Brexit, if EEA firms that currently passport into the UK notify the FCA that they wish to be included in the regime, they will be given temporary permission by the FCA under Part 4A of the Financial Services and Markets Act 2000 ("FSMA") to continue conducting the same regulated activities as under their pre-Brexit passports. Those firms are then expected to have up to three years to apply for and obtain authorisation in the UK.
Firms that would be able to use the Temporary Permissions Regime include investment firms authorised by their home state (EEA) regulator and who currently have passports into the UK under Schedule 3 to FSMA (including EEA regulated MiFID investment firms, UCITS management companies and AIFMs), under which they have established branches in the UK or provide investment services into the UK on a cross-border basis.
Additionally, the FCA has indicated that managers of EEA-domiciled UCITS and AIFs will be able to benefit from a similar temporary marketing regime where the FCA has been notified prior to Brexit of their intention to continue to market in the UK (see further below).
The FCA does not know at this stage whether the regime will be required or not, but if the regime is required, it is proposed that the Temporary Permissions Regime will come into force at 11 p.m. on the exit date (March 29, 2019). The FCA expects the regime to be in place for up to three years.
The FCA anticipates opening the window for notifications under this regime in early 2019. The notification window will close prior to the exit date, and firms that have not submitted a notification by this date will be unable to use the Temporary Permissions Regime.
After the exit date, the FCA will allocate firms a period (a ‘landing slot’) within which firms will need to submit their application for full UK authorisation. The FCA expects the first landing slot will be October to December 2019 and the last to be January to March 2021.
The UK Government has already published draft enabling legislation. In Q3/4, 2018 the FCA will publish a Consultation Paper that will set out further details of how the regime would operate and applicable fees. This will be followed by a Policy Statement and final rules early next year.
What rules will apply to firms in the regime?
In contrast to the current 'home-host' state supervisory regime, firms subject to the new Temporary Permissions Regime will fall under the full scope of the FCA's rulemaking and supervision powers. However, the FCA said it will seek to take a proportionate approach in order to enable firms to comply with the FCA’s requirements from day one. Firms will be required to comply with the following:
- All FCA Handbook rules and guidance that currently apply to them.
- All FCA Handbook rules that implement a requirement of an applicable EU directive (and relevant guidance), which are reserved to the 'home state.' The FCA intends to accept 'substituted compliance' in respect of these rules. In other words, if firms can demonstrate they continue to comply with the equivalent home state rules in respect of their UK business then they will be deemed to comply with the FCA's rules and guidance. Capital requirements will remain subject to home state rules.
- Certain additional FCA Handbook rules that are aimed at providing appropriate consumer protection.
Firms will be subject to the FCA’s supervisory approach, which means the FCA may have more direct contact with these firms. The FCA will have access to its "complete set of supervisory powers and tools," which it may use to ensure firms are compliant with the UK FCA rules.
Additional requirements for firms in the regime
Financial Compensation Scheme (FSCS) – firms will be required to contribute to the cost of the FSCS.
Financial Ombudsman Service (FOS) – firms in the regime without a UK branch should be included in the compulsory jurisdiction of the FOS and will be required to pay case fees and annual levies. Firms that have a UK branch are already included in the compulsory jurisdiction.
Senior Managers and Certification Regime (SMR) – the FCA intends to propose that firms with branches in the UK, which are currently subject to the Approved Persons Regime, continue to comply with those requirements. When the Senior Manager and Certification Regime comes into force, they would then comply with the requirements that are currently stated to apply to EEA branches.
Safeguarding client money and custody assets (client assets) – the FCA will ask firms to:
- report their client assets arrangements to the FCA
- provide an English translation of their client assets audit to the FCA upon request (for firms subject to MIFID II)
- disclose certain information to UK clients about the treatment of their client assets in the event of the firm's failure. This disclosure will have to be made at the point of entry into the regime in a durable medium or via a website.
FCA Principles of Business – the FCA Principles of Business in the PRIN Handbook will apply in full to firms in the regime.
Status disclosure – firms will be required to include specific status disclosure wording in communications to indicate that they are in the regime.
Although the FCA has said it will take a proportionate approach to the implementation of the temporary regime, these requirements are likely to require increased resources from firms subject to the regime, especially in relation to reporting.
The FCA consultation on the regime will provide further details. We shall provide updates when that becomes available.
Potential Temporary Regime for Funds
Additionally, the FCA has indicated that managers of EEA-domiciled funds (i.e., UCITS and AIFs) that have in place a UCITS or AIFMD marketing passport into the UK will be able to benefit from a temporary marketing regime where the FCA has been notified prior to Brexit of their intention to continue to market such funds in the UK. This temporary regime is likely to be most useful for retail marketing of such funds, since marketing to professional clients should be able to proceed under the UK’s private placement regimes for funds under AIFMD Article 36 or 42.
NOTE ON OUTBOUND PASSPORTING FROM THE UK: HM Treasury has spelled out that if there is a 'no-deal' Brexit, unless the EU acts to maintain continuity, then UK financial services firms will likely lose the ability to passport into the EEA when the UK leaves the EU. This may have implications for their ability to meet contractual obligations with EEA-based clients, where to do so without EEA permissions would breach relevant member state rules and any applicable EU rules that apply to third countries. Dechert is monitoring the position across EEA member states.