The FCA has issued a temporary permissions regime for inbound passporting EEA firms and funds. Under the current regime, passporting rights enable financial services firms in an EEA country to establish a presence or carry out permitted activities in another member state, subject to local supervision. Under similar passporting provisions, investment funds are marketed in EEA countries. In the event of a no-deal scenario, and in the absence of a transition period, the UK will become a ‘third-country’ to the EU. As a result, EEA firms will no longer be able to passport into the UK.
In December 2017, the Government announced the possibility of introducing a temporary permissions regime for EEA firms using passporting rights to operate in the UK; details of which have been published by the FCA. The purpose of the proposed permissions regime is to provide a backstop in the absence of a Brexit transition period. This will allow inbound firms to continue operating in the UK within the scope of their existing permissions for a limited period after the UK withdraws from the EU. The regime will also allow funds with a passport to continue marketing in the UK while seeking recognition.
The FCA proposes that EEA firms currently passporting into the UK will need to notify the Regulator in order to obtain temporary permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA). The permission will mirror the scope of the firm’s passporting permission pre-Brexit. Should the EU-UK negotiations not materialise on a deal, the temporary permissions regime will come into force when the UK leaves the EU on 29 March 2019 at 23.00. The regime could operate for a maximum of three years. During this time, firms and funds will need to obtain authorisation or recognition in the UK.
The following firms and funds will be able to use the regime:
- firms that have passports under Schedule 3 of FSMA in place before exit day
- treaty firms under Schedule 4 of FSMA which qualify for authorisation before exit day
- electronic money and payment institutions who are exercising their passporting rights under the Electronic Money Directive or the Payment Services Directive before exit day
- UCITS schemes and Alternative Investment Funds
Firms must notify the FCA if they wish to use the temporary permissions regime by following an online process. The notification window will open in early January 2019 and will close prior to exit day. Once the notification period has closed, firms that have not submitted a notification will not be able to do so.
Firms that adhere to the temporary permissions regime will have Part 4A permission and, consequently, the home-host state restrictions on regulatory action will no longer apply. This means that they will be within the full scope of the FCA supervision and rule-making powers. The Regulator has clarified that it will adopt a proportionate approach that will enable firms to comply with its requirements from Day 1.
It is also important to note that customers of firms that adhere to the regime but that do not have a UK branch will not have access to the protection offered by the Financial Services Compensation Scheme (FSCS). However, these firms will be included in the Compulsory Jurisdiction of the Financial Ombudsman Service and therefore will be required to pay case fees and annual levies.
Another important consideration that firms under the regime should take into account is that they will be required to report their client assets arrangements to the FCA, as well as disclose information to UK clients relating to the treatment of their client assets in the event of failure. Moreover, investment firms subject to MiFID II could be required to provide English translations of their client assets audit reports to the Regulator.
Whilst a number of details relating to how the regime will operate are to be confirmed, we welcome the clarity and near-term certainty that this publication offers to firms operating in the UK under passporting rights. We believe that providing an alternative solution, should the no-deal scenario materialise, is essential to our clients and will ensure they can plan accordingly. The Treasury has confirmed its intention to provide the financial services regulators with a general power to phase in post-exit requirements, which will give firms the necessary flexibility to transition to the UK regulatory framework.
The FCA will issue a consultation paper in the Autumn, which will provide further details of how the regime will function.
For more information please contact Gareth Miller.