What has happened?
As the UK prepares to leave the EU, the FCA has announced that FCA solo regulated firms should consider if or how they will be affected by Brexit and what action they may need to take. Firms need to make sure they understand the implications of Brexit and plan accordingly.
UK-based firms that only do business in the UK may be affected less directly than others or not affected at all. However, firms which carry out business between the UK and the European Economic Area– whether through a passport or directly under EU legislation – will be affected.
Passporting allows firms authorised in an EEA state to conduct business within other EEA states based on their ‘home’ member state authorisation. After Brexit, and any implementation period, passporting in its current form will end for the financial firms currently using it in the UK. This may change depending on any future agreement with the EU
This will affect:
- • firms and funds based in the UK that conduct business in the EEA, and
• firms and funds based in the EEA that carry out certain types of business in the UK
What UK firms conducting business in the EEA should consider
The following questions may help firms decide if they conduct business in the EEA or if Brexit might affect their business. They are not a full checklist.
- • Do firms currently provide any regulated products or services to customers resident in the EEA? For example, firms might provide financial advice to EEA based customers. Or firms might have insurance contracts either with EEA based customers or which cover risks located in the EEA which require regulatory permission in that country in order to be serviced.
• Do firms have customers or counterparties based in the EEA, including UK expatriates now based in an EEA country?
• Are firms marketing financial products in the EEA? This includes products marketed on a website aimed at consumers in the EEA.
• Do firms have agents in the EEA or interact with any intermediary service providers in the EEA? For example, firms may use an insurance intermediary to distribute products into the EEA.
• Does the firm transfer personal data between the UK and the EEA or vice versa?
• Does the firm have membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA?
• Are firms part of a wider corporate group based in the EEA, or does the firm receive any funding from an entity in the EEA?
• Do firms outsource or delegate to an EEA firm, or does an EEA firm outsource or delegate to firms?
• Are firms party to legal contracts which refer to EU law?
If any of these apply to firms – or firms currently conduct business in the EEA in any other way – then firms should understand on what legal basis that business occurs, whether it can continue on that basis or by other means after Brexit or whether the firm will need additional regulatory permissions.
If business takes place based on a passport then firms will need to consider if and on what basis it may be possible to continue after Brexit. Firms can find out if they use a passport by checking the Financial Services Register.
Not all these factors will automatically mean a firm’s business is affected. There are other ways firms can access the EEA which may not be affected by Brexit, although these will depend on the specific firm, type of activity and the exemption or local permission in question.
- • Permission under local law or based on rules of a local financial market infrastructure, and
• Local exemptions in an individual EU country. An example of this is ‘reverse solicitation’, where the client initiates the provision of the service on their own initiative, and firms do not promote or advertise services.
What EEA firms conducting business in the UK should consider: The Temporary Permissions Regime
Many EEA firms conduct regulated activities in the UK. In December 2017, the Treasury announced that, if necessary, the Government would enact legislation to set up a temporary permission for inbound passported firms and funds. This would allow firms to continue operating in the UK for a period of time after the exit day, before securing full authorisation.
Given the agreement on the terms of an implementation period and the Government’s commitment to providing for a Temporary Permission Regime as a backstop, EEA firms and funds that currently use an EU passport do not need to apply for UK authorisation at this stage.
EEA firms and funds that will be solo-regulated by the FCA will need to notify us that they want to use the temporary permission regime. They do not need to submit an application for authorisation when they notify the FCA of this. Dual-regulated firms should contact the PRA.
Issues to be aware of:
The UK is currently due to leave the EU on 29 March 2019. Earlier this year, the UK and EU agreed the terms of an implementation period which would apply from the end of March 2019 until the end of December 2020. During this time, EU law would still apply in the UK. Firms and funds would continue to benefit from passporting between the UK and EEA. However, the implementation period is part of the withdrawal agreement, and the agreement will be part of further negotiations between the UK and EU before it is finalised.
Changes to legislation in the UK
The FCA continues to prepare for a range of scenarios. This includes if the UK leaves the EU on 29 March 2019 without a withdrawal agreement and without the UK Government and the EU having ratified an implementation period.
The EU Withdrawal Act will convert existing direct EU legislation into UK law and preserve existing UK laws which implement EU obligations. The Government has also been given powers to amend this retained EU legislation so that it works effectively when the UK leaves the EU. The Government’s intention is that the same rules and laws will apply after exit as before, as far as possible.
As part of this, the FCA will amend and maintain EU binding technical standards, which are detailed EU rules. These rules sit underneath EU regulations and directives and give the technical detail of how firms should meet these requirements. The FCA will also be amending the Handbook to ensure it is consistent with changes the Government is making to EU law and so it still works effectively when the UK leaves the EU.
The FCA plans to consult on these changes in Autumn 2018, depending on the Treasury’s timelines for secondary legislation under the EU Withdrawal Act.
The Treasury has said it will bring forward measures that will give some flexibility in applying post- Brexit requirements, allowing firms to transition to a new UK regulatory framework. This means the FCA does not expect firms and other regulated entities providing services within the UK’s regulatory remit to have to prepare now to implement these post-Brexit requirements.
If firms conclude that they are affected by Brexit they should:
- • Work out what changes they might have to make to their business or which additional regulatory permissions they may need to continue to carry it out.
• Think about any information they will need to give to customers who might be affected by their plans and how they can provide it in a way which is clear, fair and not misleading. For example, explaining clearly to customers where a change in contractual terms might affect them.
• Consider the implications of a range of possible scenarios including an implementation period.
Firms may also want to discuss the implications with the relevant EEA regulator in the countries in which they do business or with their trade association, or get independent legal advice for further clarification. The European Commission has published notices to financial firms highlighting these implications in more detail. Details are available here.
How can Thistle help?
Thistle will continue to keep this area under review and will issue further updates where necessary. Please contact Thistle if you need assistance in relation to any of these issues.