The FCA has published 2 consultation papers with proposed changes to the Handbook and Binding Technical Standards (BTS) (CP 18/28) and separately on the Temporary Permissions (TP) regime for inbound firms and funds (CP 18/29), which are based on a “no-deal” case scenario. These are to aid the FCA in ensuring as smooth a transition as possible.
In the almost 800 pages of the CP 18/28, the FCA plans for a variety of outcomes to the Brexit negotiations, including whether, on 29 March 2019, the UK leaves the EU without an implementation period, which was agreed to start on 29 March 2019 and last until 31 December 2020 but it is subject to further negotiations between the UK and the EU. Should there be no implementation period, the FCA will need to amend the Handbook in line with the Government’s legislative changes, and to reflect the UK’s new position outside of the EU. The Handbook implements and refers to EU legislation and to UK law (which relates to or refers to the EU), to EU institutions and concepts, and to the EEA. Leaving the EU and amending current legislation in accordance to the European Union (Withdrawal) Act 2018 (EUWA), (which will repeal the European Communities Act 1972), requires updating the Handbook. This is to reflect the UK’s new legal and regulatory framework after exit day so that it remains functional. In the same way, the FCA will need to amend EU BTS, which are detailed EU rules, for which the UK regulator will gain responsibility.
No wider policy change is proposed (and nothing unrelated to Brexit) and most of the amendments proposed are straightforward changes to references to:
- EU legislation;
- UK law which relates to or refers to the EU;
- EU institutions and concepts (including ESMA, which will no longer have powers or obligations under UK law);
- the European Economic Area (EEA).
Areas covered by the changes relate to prudential rules for FCA regulated firms, conduct of business rules, rules for UK funds and fund managers covered by EU fund management legislation (e.g. UCITS and AIFMD), and rules affecting other market participants, including UK investment firms covered under EU markets legislation (e.g. MiFID).
Amendments to BTS refer to markets and financial market infrastructure, fund management, credit ratings agencies and trade repositories (entities which the FCA will have a new responsibility for supervising after Brexit), and short selling practices.
What however seems to be inconsistent in this CP is that the FCA confirms that EU Level 3 material issued by the European Supervisory Authorities (ESAs), which includes non-legislative Guidelines, Recommendations on the application of EU law, Opinions, Q&As, will not be incorporated into UK law. The FCA considers that this material will continue to be relevant after exit day for financial institutions and other market participants; and expect them to interpret all EU Level 3 material sensibly and purposively, taking into account the UK’s withdrawal from the EU, the provisions of the EUWA and amendments made to relevant legislation in the withdrawal process. The only exception is in relation to the Remuneration Code (SYSC 19). This is in regard to the calculation of the applicable notional discount rate for variable remuneration, which is needed as the formula for this calculation relies on inflation and interest rates produced by Eurostat and these figures may not continue to be produced for the UK following exit day.
CP 18/29 also addresses the scenario of the UK leaving the EU without an implementation period, in which case the passporting regime and reciprocal market access would no longer be available. EEA-based firms could experience an abrupt loss of permission, and may need to seek authorisation in the UK (“a third-country”) to continue to carry on a regulated activity in the UK. Similarly, EEA-domiciled investment funds would need to seek recognition in the UK to continue to market in the UK. The Government has, therefore, legislated for a temporary permissions regime to allow relevant EEA firms and investment funds (UCITS and AIFs funds) to continue to access the UK market while seeking full authorisation or recognition in the UK. Given that only FCA authorised or recognised funds may be prmoted to retail investors in the UK, the regime will have the effect of temporarily recognising each individual fund or sub-fund to allow it to continue to be marketed to retail investors in the UK (if it was eligible to be marketed in the UK under the passporting regime).
This consultation paper sets out:
- Details of the regime for both firms and fund marketing activities, including which firms and investment funds can use the regime (all incoming firms, branch or cross-border), and which funds can continue to market in the UK with no need to use the regime (e.g. UK authorised funds);
- How the regime will operate for firms including what the FCA expects from firms and how it will supervise them;
- The rules which will apply to firms and fund marketing activities during the regime (e.g. PRIN, GEN, COLL, CASS, SUP etc.);
- Additional information for Electronic Money Institutions, Payment Institutions and Registered Account Information Service Providers;
- How the regime will operate for investment funds;
- A proposal for how the regime will be funded (TP firms should contribute to the Single Financial Guidance Body costs from the 2019/20 levy year onwards on the same basis as UK firms and to the Financials Services Compensation Scheme).
Generally, TP firms will need to continue to comply with those rules which currently apply to them based on the activities they carry on, either in the UK, or in their home state, or of the country from which they provide services into the UK (country of origin). The FCA would not take on responsibility for supervising rules that apply to an investment fund or its manager in their home state.
A temporary permission will last for a maximum of 3 years, varying from firm to firm and depending on when they are asked to submit their application for full authorisation in the UK and subsequently leave the TPR (“landing slot”). The FCA expect to open the notification window in early 2019 and close it before exit day, after which firms that have not submitted a notification will not be able to use the TPR.
This consultation paper, which aims to preserve the status quo, is relevant to those EEA firms and investment funds currently doing business in or into the UK, or being marketed in the UK, through a passport. Gibraltar-based firms that passport into the UK will be able to continue to operate as they do now without needing to enter the TPR.
An interesting point to note is that the FCA has confirmed that marketing of relevant investment funds in the UK is not a regulated activity, though it is subject to the restrictions on financial promotions. It is the FCA’s view that a non-UK-domiciled fund will always need to be either recognised under FSMA or registered under the national private placement regime to be marketed in the UK after exit day.
Comments on both consultations should be submitted by 7 December 2018. Responses can be submitted via the FCA’s online form, by email or in writing. The FCA is keen to hear from the widest possible range of stakeholders across sectors, including industry bodies and consumer groups. However, firms are not immediately expected to start preparing the implementation of new requirements.
The FCA has stated that it tried to balance several factors, including consumer protection, nature and proportionality of the new regime, etc., in an attempt to minimise disruption for consumers and other market participants on exit day and beyond. Their position is that most of the proposed changes are consequential in nature and do not involve a choice on their part, reflecting the effect EUWA will have (“unless they will diverge from this approach where it is necessary”). If the UK and the EU agree on the terms of the withdrawal agreement, and there is an implementation period, the amendments consulted on in both these CPs will not come into effect on 29 March 2019. Changes to be made to the Handbook and to BTS after the implementation period will depend on the outcome of the negotiations on the future relationship between the UK and EU. In the event that the UK and the EU are unable to agree on the terms of the withdrawal agreement and the UK leaves the EU without an implementation period, firms and other regulated persons will have a limited amount of time to act on changes to requirements before exit day.
Speaking at the Association of Financial Markets in Europe’s annual conference on 2 October 2018, Charles Randell, chair of the FCA, confirmed that any regulatory change in the wake of Brexit should be “phased and co-ordinated in a proportionate way”.
It is difficult for any stakeholder to predict how negotiations will develop and what the implications will be for firms and investors. A prudent approach would be to prepare for a ‘no-deal’ scenario, knowing that any better scenario would result in less immediate disruption.
To paraphrase Benjamin Disraeli in The Wondrous Tale of Alroy, be prepared for the worst, but hope for the best.
The FCA has published a new webpage on the preparation for Brexit.
HM Treasury has communicated that it will bring forward measures that will give the regulators some flexibility to phase in changes to firms’ regulatory requirements under EUWA. HM Treasury has published the following draft statutory instruments:
- The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 and explanatory memorandum;
- The Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018and explanatory memorandum;
- The Short Selling (Amendment) (EU Exit) Regulations 2018 and explanatory memorandum;
- The Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 and explanatory memorandum; and
- The Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018and explanatory memorandum