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Brexit TPR - BAU, almost

Brexit TPR - BAU, almost

17th October - Following the draft Statuary Instrument published by HM Treasury on 24 July, which introduces the Temporary Permissions Regime (TPR) for EEA firms that currently access the UK market via passporting licences (“TP firms”), the Financial Conduct Authority (FCA) has published a consultation paper on the detail of how the regime will work. It seeks comments by 7 December, with feedback and final rules scheduled for Q1 2019, ahead of the day of exit.

A third paper is expected from the Prudential Regulation Authority (PRA) shortly. The suite of papers aims to mitigate potential risks of a “no deal” Brexit scenario for EEA financial services firms and EEA funds offered in the UK.

The TPR will come into effect on exit day if there is no implementation period and is intended to run for no more than three years. Provided a firm or fund has correctly notified the FCA (see below) of its intention to use the TPR and intends to apply for a full authorisation during this period, they will be eligible for the regime.

Implications for EEA firms and funds

The FCA’s overall intention is to preserve the status quo as much as possible. However, certain additional rules and levies will apply to inbound firms and funds using the TPR, so it will not quite be business as usual. 

Inbound firms and funds need to factor in the various FCA timelines for the TPR notification process and the subsequent full authorisation application, which will be open in prescribed time slots between October 2019 and March 2021.

They will also need to plan and action their own internal processes for coming into compliance with the additional rules (described below) by exit day. In particular, the FCA Principles for Business are wide-ranging in scope and provide an over-arching framework for how the FCA expects firms to operate. It is not clear what “meeting the Principles” will mean for EEA firms and whether, and if so what extent, elements of the Principles might in practice fall under the “substituted compliance” proposal.

Waivers or modifications may apply in some instances, as described in the FCA’s consultation on Handbook changes.

The general approach – BAU, almost

The TPR will allow EEA firms currently passporting into the UK to continue to operate in the UK for a limited period after Brexit (“TP firms”). Similarly, under the TPR Funds Regulations, managers of Undertakings for Collective Investment in Transferable Securities (UCITS ManCos) and Alternative Investment Funds (AIFMs), which currently market their funds in the UK, will be able to continue to do so (“TP marketing fund managers”).

During the TPR, the FCA proposes to require TP firms to comply, in respect of their UK business, with:

  • All FCA rules that currently apply to them.
  • All FCA rules that implement a requirement of an EU directive, which are currently reserved to the TP firm’s home state and which the FCA therefore does not currently apply (home state rules). However, where firms can demonstrate they continue to comply with the equivalent home state rules in respect of their UK business, the FCA will accept ‘substituted compliance’ in respect of these rules.
  • Certain additional rules that the FCA believes are necessary to provide appropriate consumer protection or that relate to funding requirements (see below).
  • Also, the FCA Principles for Business, other than Principle 4, will apply in full.

Similarly, operators, depositaries and trustees of EEA-domiciled investment funds should generally continue to comply with the same rules that currently apply to them. However, the FCA does not propose to take on responsibility for supervising rules that apply to an investment fund or its manager in their home state.

Firms and funds will also need to consider any FCA guidance relating to any of the above rules and will be required to pay all fees and levies applicable during the TPR, which will include ones that do not currently apply to inbound firms.

The FCA will continue to work closely with regulators across Europe to ensure that firms operating across jurisdictions, including TP firms, are subject to appropriate oversight.

Additional rules that will apply to EEA firms in the TPR

  • The FCA Principles for Business will apply in full to TP firms, with the exception of Principle 4 (financial prudence), since the FCA will limit its supervision to UK business.
  • In particular, Principle 11 (notification to the FCA) will apply.
  • TP firms will be able to comply with UK rules on the safeguarding of client money and custody of assets through substituted compliance. However, they will need to report to the FCA their client assets arrangements and to provide the client assets audit report (translated into English).
  • TP firms will be required to contribute to the various levies that apply to UK firms, such as the Financial Services Compensation Scheme (FSCS), Financial Ombudsman Service (FOS) and, from the 2019/20 levy year onwards, the Single Financial Guidance Body and the Devolved Authorities (SFGB) costs. The illegal money lending (IML) levy will also apply to consumer credit TP firms
  • Customers of TP EEA branch firms (i.e. firms with a UK establishment) will have FSCS protection, which will provide cover equivalent to that available for customers of UK-authorised firms.
  • EEA services firms will fall within the Compulsory Jurisdiction of the FOS and the complaints-handling rules will apply.
  • The Senior Managers and Certification Regime (SMCR) and Approved Persons Regime (APR) will continue to apply to TP EEA branch firms.


EEA firms and funds that can use the TPR

Firms that currently operate in the UK on the basis of either freedom of establishment (EEA branch firms) or freedom to provide services (EEA services firms), including those that are dual-regulated by the Prudential Regulation Authority (PRA), will be eligible for entry into the TPR regime, provided they are already in the authorisation process or have formally notified the regulators of their intention to join the TPR. The scope of authorisation for their period in the TPR will be the same as existed at exit date.

The TPR will not be available to any firms that do not currently use the passporting regime. The FCA has set out separately how it proposes to deal with Credit Rating Agencies, Trade Repositories and Data Reporting Services Providers under MiFID. Such firms will have to apply for full FCA registration.

The FCA has also published its approach to EEA market operators seeking to apply to become recognised overseas investment exchanges.

Funds that can use the TPR are:

  • EEA-domiciled UCITS recognised under FSMA s.264 to market to all investors in the UK
  • EEA-domiciled AIFs that are marketed to professional investors in the UK
  • European Venture Capital Funds and European Social Entrepreneurship Funds that immediately before exit day have been notified to the FCA for marketing in the UK in line with the relevant legislation
  • European Long-Term Investment Funds that are marketed either to all investors or to professional investors only, in line with the relevant notification procedure

The TPR will not be relevant for UK authorised funds, funds currently benefitting from exemptions under FSMA, non-EEA funds using private placement, AIFs individually recognised by the FCA under FSMA s.272 or closed-ended investment companies whose securities are officially listed or admitted to trading on a regulated UK market.

TPR notification and future full authorisation process

The FCA will establish an online process to be used for notification of a firm’s intention to use the TPR, using the FCA´s Connect system. Fund managers will need to notify the FCA that they want to continue to market their funds to investors in the UK. The FCA expects to open the notification window in early 2019 and it will close before exit day. Once the notification window has closed, firms that have not submitted a notification will not be able to use the TPR. Further information will be provided by the FCA on how to complete the notification process and the exact dates.

Following exit day, the FCA will allocate each TP firm a three-month application period or ‘landing slot’, during which it will need to submit its application for full authorisation in the UK. The first landing slot will be October to December 2019, followed by a further five landing slots, the last one closing at end-March 2021.

If a firm changes its plans and no longer needs a temporary permission and does not expect to apply for UK authorisation, it can apply to cancel this only once it has ceased all UK business.


 

 Additional rules that will apply to EEA firms in the TPR

The FCA Principles for Business will apply in full to TP firms, with the exception of Principle 4 (financial prudence), since the FCA will limit its supervision to UK business.

In particular, Principle 11 (notification to the FCA) will apply.

TP firms will be able to comply with UK rules on the safeguarding of client money and custody of assets through substituted compliance. However, they will need to report to the FCA their client assets arrangements and to provide the client assets audit report (translated into English).

TP firms will be required to contribute to the various levies that apply to UK firms, such as the Financial Services Compensation Scheme (FSCS), Financial Ombudsman Service (FOS) and, from the 2019/20 levy year onwards, the Single Financial Guidance Body and the Devolved Authorities (SFGB) costs. The Illegal money lending (IML) levy will also apply to consumer credit TP firms

Customers of TP EEA branch firms (i.e. firms with a UK establishment) will have FSCS protection, which will provide cover equivalent to that available for customers of UK-authorised firms.

EEA services firms will fall within the Compulsory Jurisdiction of the FOS and the complaints-handling rules will apply.

The Senior Managers and Certification Regime (SMCR) and Approved Persons Regime (APR) will continue to apply to TP EEA branch firms.


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