This article was first published on Lexis®PSL Financial Services on 18 April 2018. Click for a free trial of Lexis®PSL.
Michael McKee, Partner and Head of Financial Services Regulatory at DLA Piper UK LLP
James Barnard, Associate in the Financial Services Regulatory team at DLA Piper UK LLP
How have the FCA and PRA described their approaches to preparations for Brexit in light of the implementation period agreed at the March European Council?
The Bank of England (which the PRA sits within) and the FCA have both welcomed the transitional Brexit agreement reached between the UK and EU27.
In high level terms, both regulators agree the transitional agreement should ensure that EEA firms carrying on regulated activities in the UK, either through an EU passport or under the EU framework for CCPs, can reasonably plan on continuing such activities until December 2020 (the end of the transitional period) without needing to seek authorisation or recognition in the interim.
Although the transitional agreement is subject to the final UK withdrawal agreement being ratified, both regulators have made reference the Treasury’s ‘Temporary Permission Regime’ proposal as a back-stop. Through this, the Government announced plans to legislate for extending (for a limited period) the ability of firms currently relying on a passport to operate in the UK to continue to do so without further authorisation following the UK’s withdrawal from the EU.
The FCA and PRA have stressed that they envisage continued close supervisory cooperation between UK and the EU regulatory bodies.
What approach is the PRA taking to the authorisation and supervision of international banks, insurers and central counterparties (CCPs)?
In December of last year, the PRA consulted on refreshing its policy towards authorising and supervising international banks and insurers branching into the UK.
The proposed policy approach was to look at, on a case-by-case basis, how systemic such firm’s activities were to the UK financial system, the materiality of the firm’s retail business and the degree of equivalence of the home state regulatory regime. A decision would then be taken on whether the firm needed to establish a UK subsidiary, or whether it could operate using a branch. The PRA stated at the time that the policy proposals should not affect the current operations of non-EEA firms operating in the UK.
The Bank of England also contacted non-UK CCPs on its expectations regarding the requirements for such entities to apply for UK recognition following Brexit. Under the proposals, recognition would be required if CCP firms proposed to provide clearing services to clearing members or trading venues established in the UK, to be used by market participants to satisfy mandatory UK clearing obligations or if the CCP were deemed a “qualifying CCP” under UK law for capital requirements purposes.
How has the PRA’s approach changed from the proposals outlined in its December 2017 consultation?
Broadly the changes proposed in the December 2017 consultation papers were supported by industry, although certain clarifications were sought on the proposals.
The PRA’s only material change was to the approach taken to insurers, to increase the FSCS-protected liabilities threshold from £200 million to £500 million for requiring authorisation as a UK subsidiary rather than conducting business as a branch.
This change is likely to be welcomed by affected insurers and broadly brings it into line with equivalent thresholds for banks.
What should UK and EEA firms be doing now to prepare for Brexit in light of the approaches described by the FCA and PRA?
The transitional period buys firms passporting into the UK breathing space, but it is not a solution in itself. Whilst current EEA firms passporting into the UK can plan on not requiring PRA or FCA authorisation before December 2020, they will need to have Brexit strategies in place before this new date in order to ensure a smooth transition for their business.
Once a clear Brexit plan has been formulated within an EEA firm passporting into the UK, there should be appropriate engagement with the firm’s UK supervisors to ensure that there are no surprises as the end of the transitional period approaches. The PRA, for example, have stated that they expect to continue to work closely with affected firms and will, where relevant, provide guidance on the timing of their applications in light of their individual circumstances. The Bank of England advised non-UK CCPs to continue to engage with them on the UK recognition process, and encouraged such firms to get in contact.
It is also worth noting that although the announcements provide clarity for EEA firms passporting into the UK, it does little to assist UK firms passporting into the EU. It is hoped that further certainty will be provided in due course by European regulators, although the FCA specifically advises firms to speak with their relevant EU supervisor for guidance.