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Brexit Temporary Permissions Regime

Brexit Temporary Permissions Regime

As part of the UK’s official planning to mitigate potential risks to the financial services sector of a “no deal” Brexit scenario, HM Treasury published on 24 July a draft of the regulations1 that will enable the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to operate a "temporary permissions regime" (TPR). The regime will come into effect only if the EU and the UK do not ratify the Withdrawal Agreement.

In the event of a no deal, and to benefit from the TPR, firms must notify the relevant regulator (PRA or FCA) during the “notification window” of their intent to pursue temporary authorisation after Brexit day. The regulators will open the window from January 2019 to the day before Brexit (ie 29 March 2019). Firms that have not made the relevant notification by that date will not be able to rely on the TPR. 

1 The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

Actions for EEA inbound firms

Firms should complete the FCA or PRA online survey, if they have not done so already. This short survey includes questions covering contact details, the directives under which firms are passporting into the UK and firms’ intentions around accessing the UK market following the UK’s withdrawal from the EU. The information provided will allow the PRA and FCA to identify firms for which a temporary permission may be relevant and enable direct communications with interested firms about the regime and authorisation process, as well as to support and shape the overall design of the regime.

Also, given the shortness of the window, it is very important that all types of EEA firms or investment funds that provide financial services of any sort into the UK now take the necessary steps to prepare their notifications. Otherwise, they may find that any form of cross border activity carried out under the relevant EU branch or services passports (or other inbound activities that are at the discretion of the UK) are abruptly curtailed on Brexit day.

Firms should look out for the proposed consultation papers on the new rules in Autumn 2018, with the accompanying policy statements expected early next year.

Issues for UK firms

The TPR assists only inbound European Economic Area (EEA) firms or investment funds. At present no reciprocal offer (for UK firms or funds currently passporting into the EEA) has been made by the EU. Its official negotiating position remains that there can be a transitional period only if all elements of the UK’s withdrawal are agreed. If no such agreement is reached, Union law will cease to apply directly on the day of Brexit.

Some pieces of EU legislation do not include the ability for third country firms to provide services into the EU, and those that do generally require that the UK’s regulatory regime first be confirmed “equivalent”. Absent a transition, there may well be a delay in the UK obtaining such confirmations. As such, the future for access to the EU remains uncertain for financial services in general, and for the retail clients in particular.

It continues to be a priority, therefore, for all firms (both UK and EEA) to finalise and implement their Brexit plans. The TPR, although welcome in many ways, would effectively do no more than delay the impact of Brexit, and only for inbound EEA firms and funds.


The TPR – key details

  • The TPR Regulations will be brought into force only if the UK and EU27 do not ratify the Withdrawal Agreement.
  • The Regulations will give permissions under Part 4A of The Financial Services and Markets Act 2000 (FSMA) on a temporary basis.
  • The permissions will reflect the scope of the firm’s passporting permissions pre-Brexit.
  • The TPR would apply from 11pm (GMT) on 29 March 2019 and would last for a period of three years. HM Treasury would retain the right to extend the regime for 12 months at a time.

Scope of the regime

Inbound EEA firms will be able to rely on the TPR in cases where before exit day they possess a branch or a cross-border services passport, provided they currently act under:

  • Schedule 3 to FSMA (passporting firms – i.e. those firms passporting under the EU Single Market
  • Schedule 4 of FSMA (Treaty firms – i.e. those firms that do business on a cross-border basis in
    the absence of passporting rights, who qualify under Schedule 4), or
  • Passporting pursuant to the Electronic Money Directive or the newly revised Payment Services Directive
  • Legislation covering payments/e-money institutions and investment funds will be set out separately.
  • Firms should be aware that where they are regulated in the EU they will continue to be subject to the
    supervising powers of the competent authority which has granted the authorisation, including the power to restrict or limit the business, operations or network of institutions or to request the divestment of activities that pose excessive risks to the soundness of the business.

Notification process

The regime requires a notification to be made to:

  • The PRA for deposit-taking EEA credit institutions, insurance firms and significant investment firms
  • The FCA for all other firms.

This can take the form of an application for authorisation if already submitted or through notification prior to Brexit day. The FCA plans to open its notification portal in early January 2019.

The TPR is designed to allow the regulators to process the applications for authorisation from firms in a measured way. It will extend the current six-month (complete application) and 12 month (incomplete application) periods for regulatory review of applications to three years for the PRA.
Incoming EEA firms with Part 4A permissions in addition to passported activities (i.e. EEA firms with consumer credit top-up permissions) will be able to act within the scope of their current permissions, notwithstanding that they will have to submit a Variation of Permission to include the passported permissions.

Firms applying for authorisation from the FCA will be allocated a "landing slot" in which they will have to submit their authorisation application. These slots will be confirmed after Brexit, with the first one being October to December 2019 and the last being January to March 2021.

For deposit-taking EEA credit institutions, significant investment firms and insurers, the PRA notes that firms may make either:

  • A notification where it has not made an authorisation application before exit; or
  • An application for authorisation.

Supervisory scope applying to firms within the regime

The impact of the TPR would be that firms relying on it will have a Part 4A permission, meaning that they will come within the UK regulators’ scope of supervision. Notwithstanding this, the FCA notes that it will “seek to preserve the status quo as much as possible”.

In overview, the principles of FCA supervision that will apply to firms within the TPR will involve compliance with:

  • All presently applicable FCA Handbook provisions;
  • All FCA Handbook provisions that implement an EU directive, but which would currently be reserved to the "home state" regulator under the pre-Brexit passporting regime. The FCA’s intention is to accept “substituted compliance” in respect of these rules, meaning that firms can rely on their compliance with "home state" rules instead of FCA rules.
  • There is an exception to this approach in relation to home state capital requirements, as it would require the FCA to oversee the firm’s worldwide capital position, rather than just supervise it in respect of its UK business (which it does not consider to be practical or appropriate).

HM Treasury intends to grant the FCA and the PRA power to grant forms of transitional relief in order to phase in their post-Brexit requirements.

Detailed requirements on firms

  • Financial Services Compensation Scheme (FSCS):
    • During the TPR, the FSCS would cover only UK branches (with limited exceptions), in relation to areas within the FCA’s supervisory remit
    • UK branches newly subject to the rules would be required to contribute to the cost of the FSCS
  • Financial Ombudsmen Service (FOS):
    • The FOS would also cover firms without a UK branch, ensuring customers of these firms will not lose rights to refer complaints
    • Firms would be required to pay case fees and annual levies
  • Senior Managers and Certification Regime (SMCR):
    • Where firms with branches are currently subject to the Approved Persons regime, they should continue to comply with that until the SMCR comes into force (currently 9 December 2019)
    • Firms already subject to the SMCR should monitor developments from the PRA in this regard
  • Safeguarding client money and assets; firms conducting investment business or insurance mediation should:
    • Report their client assets arrangements to the FCA
    • Provide English-translation audit reports to the FCA where they are EEA firms subject to MiFID II
    • Disclose the treatment of their assets in a failure situation prior to entry into the regime in a durable medium.
  • The Principles for Businesses (PRIN) sourcebook will apply in full.
  • Disclosures of the fact that the firm is in the regime will be required.
  • Contributions to the Single Financial Guidance Body will be required from 2019/20.
  • Passported consumer credit firms will need to make payments to the illegal money lending levy.

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