27th November - The Financial Conduct Authority (FCA) has issued its second consultation paper (PDF 13.8MB) on the rules that would apply in the event of a ‘no deal’ Brexit.
The first consultation paper, and the FCA’s proposed temporary permissions regime (TPR) for onshoring EEA firms, were covered in our earlier alerts – Brexit TPR - BAU, almost, October 2018 and Proposed "no deal" rules, October 2018.
This second consultation paper covers the FCA’s proposed approach to a wide range of topics where HM Treasury has laid further Statutory Instruments, or where the FCA has discovered further issues arising from the application of the cross-cutting approach set out in its first consultation paper. The paper also covers the transfer of the regulation of UK registered credit rating agencies and trade repositories to the FCA and a series of detailed amendments to Binding Technical Standards.
This range of topics is relevant to a wide range of UK and EEA firms (including issuers of securities from the EEA) as part of their preparations for the possibility of a ‘no deal’ Brexit on 29 March 2019. The consultation period runs for only four weeks, until 21 December 2018.
In the detail…
Distance marketing – the end of passporting arrangements means that where UK firms conduct cross-border distance marketing business into the EEA they may need to be authorised in the relevant Member State, and local law requirements implementing the Distance Marketing Directive may apply. The FCA’s earlier consultation on the TPR set out the FCA’s proposed approach to EEA passporting firms who enter TPR.
E-commerce – the Government intends to revoke some legislation relating to the cross-border provision of financial services through the exemption from host state regulation in the E-Commerce Directive. The FCA proposes to make consequential amendments to its Handbook to reflect this. The FCA’s e-commerce rules will apply to EEA based firms which enter the TPR.
Language for communications – the FCA proposes to make a cross-cutting amendment for Brexit, such that the requirements refer to the official language or one of the official languages of the UK.
Fees – entities operating in the UK under a passport may currently benefit from a discounted fee because the FCA’s regulation of them is limited to that of a ‘host’ regulator. As passporting will no longer be possible, discounting of fees will also cease.
Senior Managers and Certification Regime (SMCR) – the FCA sets out how it proposes to apply the Approved Persons Regime (APR) and the SMCR to non-TPR branches of EEA firms, and to retain the existing SMCR and APR EEA branch regimes for firms in the TPR, with a few amendments.
Contractual recognition of bail-in – on exit day, all contracts for relevant liabilities governed by the law of an EEA member state will become subject to the provisions on third country contractual recognition of bail-in. Firms will therefore need to include a new term in the relevant contracts for liabilities such that the creditor agrees that the liability may be written down or converted by the Bank of England. This would apply to any new contracts and to any existing contracts that are materially amended after exit day.
Claims representatives – the FCA proposes to remove the requirement for UK-based insurers providing motor insurance to appoint a claims representative in every EEA state, while the reciprocal requirement for EEA-based insurers being required to appoint claims representatives in the UK will fall away.
Claims handling -– the FCA proposes to retain rules on the maximum timescales for insurers to respond to claims made by injured parties for the benefit of both UK and EEA injured parties, so that claims made against compulsory motor insurance are handled consistently regardless of whether the injured party is a UK or EEA resident.
Disclosure of information on UK and EEA compensation schemes – the FCA proposes to require firms carrying out non-MiFID business to disclose information about UK compensation schemes only (i.e. the Financial Services Compensation Scheme), and to require a firm to ensure that any reference in advertising to an investor compensation scheme established under the Investor Compensation Scheme Directive applies to worldwide compensation schemes (rather than just the FSCS). Firms’ advertising would thereby continue to be limited to factual references to EEA compensation schemes, but in a way that treats EEA compensation schemes the same way as those in third countries.
Compensation scheme coverage – incoming EEA-based firms in the TPR will be expected to communicate to their customers any material changes in home state investor compensation scheme coverage, as a result of Brexit. The FCA will also expect such a firm to provide, on a customer’s request, information concerning the firm’s inclusion in any compensation schemes, including the firm’s home state scheme.
TPR firms disclosure – TPR firms will be expected to disclose their status to retail consumers.
Appropriateness test – the FCA proposes to retain the current scope of this test and to consider shares and bonds admitted to trading on UK and EEA regulated markets as being essentially non-complex.
Product information – reflecting HM Treasury onshoring legislation, the FCA proposes to maintain post-exit the exemption from the product information obligations under the PRIIPs Regulation for both UK and EEA UCITS, on the basis that these manufacturers are obliged to prepare a KIID under the UCITS Directive, and to maintain a similar exemption for manufacturers of non-UCITS retail schemes offered to retail investors where they are subject to similar rules as those that apply in relation to UCITS funds.
Insurance special purpose vehicles (ISPVs) – as Solvency II firms are exempted from MiFID II, the MiFID II rules do not apply to these ISPVs. The FCA proposes to continue allowing ISPVs that assume risks from EEA insurers to continue with this exemption.
Prospectuses – certain issuers that currently rely on a passported document will need to have a prospectus approved by the FCA, and to make disclosures according to the FCA’s rules.
Listing – the UK’s primary markets regime will apply post-exit to all issuers that have securities admitted to trading on a regulated market in the UK or admitted to listing in the UK, or are making a public offer in the UK.
Listing rules free float – the FCA proposes to remove the reference to EEA holders in the obligation on issuers to maintain the level of shares in public hands within the EEA at 25% or above, so holders from any jurisdiction can be counted towards the free float.
Transparency Rules – the FCA proposes that post-Brexit the transparency rules will only apply to issuers with securities admitted to trading on a UK regulated market.
Accounting – the FCA proposes that issuers registered in EEA states with securities admitted to trading on a UK regulated market or making an offer of securities in the UK will be able to continue to use EU-adopted IFRS when preparing consolidated accounts, and to continue to prepare financial accounts using EU-adopted IFRS for financial years beginning before exit date.
Auditors – post-Brexit, auditors based in the EEA will become subject to the requirements currently applicable to third country auditors, including registration with the FRC. This will also apply when they audit UK-traded EEA issuers. The FCA proposes that for financial years beginning before exit day, the current provisions allowing the use of an EEA auditor without registration will remain in force. Registration for financial years beginning on or after exit day will be required in time for the auditor to sign the relevant audit report.
Notification requirements on issuers and on holders of voting rights – the exemption from this requirement will apply only to the Band of England, not members of the European System of Central Banks, in the context of carrying out their functions as monetary authorities.