- Posted by Michael McKee
- On 30 October 18
- Brexit, Consultation paper, EEA, FCA, Temporary Permissions Regime
On 10 October 2018, the FCA published Consultation Paper 18/29 on the Temporary Permissions Regime (TPR) for inbound firms and investment funds from the European Economic Area (EEA) (Consultation Paper).
The Temporary Permissions Regime
If the UK leaves the EU in March 2019 without having reached an agreement on the terms of an implementation period, EEA firms and investment funds will no longer be able to benefit from the EU passporting regime. However, an abrupt loss of permissions to operate in the UK is likely to have an adverse impact on the business of the relevant firms and investment funds, as well as wider implications in terms of consumer protection and market integrity.
In preparation for all possible scenarios, specific transitional measures have been proposed to ensure a fully functioning financial services regulatory regime for the UK in the event of a ‘no deal Brexit’, also known as ‘onshoring’. In particular, these include:
- the EEA Passporting Rights (Amendment, etc. and Transitional Provisions) (EU Exit) Regulations 2018 (TPR Regulations), which introduce a TPR for EEA firms which passport into the UK under the Financial Services and Markets Act 2000 (
- the Draft Payments and Electronic Money (Amendment) (EU Exit) Regulations (TPR Payments Regulations); and
- the Draft Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 and the Draft Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2018, which introduce a TPR for fund marketing activities (TPR Funds Regulations). For more information on these draft statutory instruments, please see here.
These transitional measures will allow EEA firms and investment funds passporting into the UK to continue undertaking regulated activities in the UK for a limited period of time after Brexit without a need for authorisation or recognition. Under the TPR, eligible firms will be able to undertake new business, provided it falls within the scope of their existing permissions, continue to perform their contractual rights and obligations and manage existing business. The TPR will also allow relevant EEA-domiciled investment funds to continue to be marketed in the UK to new and existing investors.
In addition to the above specific transitional measures, HM Treasury also proposed to provide a temporary power to the UK regulators, namely the Bank of England (BoE), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), to grant transitional relief to all or certain categories of firms by waiving or modifying regulatory requirements. For more information on this proposal please see here.
The Consultation Paper
The Consultation Paper sets out the details of the TPR and explains what eligible entities entering the regime should expect.
Conditions for entering the TPR
The following entities may enter the TPR:
- EEA firms, exercising their branch or services passporting rights, (TP firms), which include:
- EEA firms and Treaty firms qualifying for authorisation to carry out a regulated activity in the UK under the FSMA passporting regime before exit day;
- EEA firms and Treaty firms as above but with a top-up permission;
- EEA Payment Institutions (PIs) and EEA Registered Account Information Service Providers (RAISPs) which, before exit day, have the right to offer payment services in the UK, under the passporting regime; and
- EEA Electronic Money Institutions (EMIs) which, before exit day, have the right to offer electronic money issuance, redemption, distribution or payment services in the UK under the passporting regime.
- Fund managers marketing the following investment funds (TP marketing fund managers), provided they were entitled to market such funds in the UK under a passport before exit day:
- EEA-domiciled Undertakings for Collective Investment in Transferable Securities (UCITS) funds that have been recognised under FSMA to market to all investors in the UK;
- EEA-domiciled Alternative Investment Funds (AIFs) which are entitled to be marketed to professional investors in the UK, under the Alternative Investment Fund Managers Regulations 2013 (AIFM UK Regulations), following receipt by the FCA of a regulator’s notice or following approval by the FCA, where necessary;
- European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship Funds (EuSEFs) which immediately before exit day have been notified to the FCA for marketing in the UK; and
- European Long-Term Investment Funds (ELTIFs), entitled to be marketed to all investors or to professional investors.
The following funds do not need to use the TPR: UK authorised funds, i.e. UCITS schemes, Non-UCITS Retail Schemes (NURS) and Qualified Investor Schemes (QIS); funds marketing in the UK using certain exemptions in the UK regulations; non-EEA AIFs marketed in the UK through the UK’s private placement regime (but these must be notified to the FCA); AIFs which have received individual recognition from the FCA under FSMA; closed-ended investment companies whose securities are officially listed or admitted to trading on a regulated UK market.
The TPR will not cover Credit Rating Agencies, Trade Repositories and Data Reporting Services Providers, which are entities that do not use the passporting regime.
If they need to be PRA-authorised, EEA insurers and credit institutions that intend to continue accepting deposits in the UK after exit day need to contact the PRA and be aware of any information published by it. However, the FCA Consultation Paper remains relevant to the extent that it covers matters within the responsibility of the FCA, i.e. conduct matters.
Eligible firms and investment funds will not enter the TPR automatically, but rather need to notify the FCA of their intention to do so through ‘Connect’, the FCA’s online notification system. The relevant notification window will open in early 2019 and close before exit day. Entities that fail to meet this deadline will not be able to benefit from the TPR and will thus, on exit day, be treated as third country firms.
TPR operation and timeframe
It is expected that the TPR will become effective on exit day and will remain in place for a maximum of three years. By its nature, the TPR is a temporary measure and consequently, in order for interested parties to continue to carry on regulated activities in the UK in the long term, appropriate authorisation applications will have to be submitted to the UK regulators
Eligible firms and investment funds that have notified the FCA in accordance with the above will be allocated a three-month application period or ‘landing slot’ to submit their application for full UK authorisation or their application/notification for recognition respectively. Firms with top-up permissions will need to submit a Variation of Permissions application rather than an application for authorisation.
Change of activities
While in the TPR firms may change their activities and undertake further regulated activities by applying for these as part of the overall application for full authorisation in the UK. With regards to investment funds, a fund manager may continue marketing a fund to the same client category as before exit day. It will not be possible for the fund manager to:
- add any new schemes to the funds in the TPR (stand-alone or umbrellas);
- add new sub-funds to umbrella schemes in the TPR; or
- change or extend the category of customer to be marketed to while a fund is in the TPR.
The TPR will be funded through periodic fees and special project fees paid by TP firms and periodic fees paid by TP funds.
Applicable rules and supervision under the TPR
Having considered several factors, including proportionality and the need to minimise disruption for the benefit of consumers and other market participants, the FCA aims to maintain the status quo so that firms and fund operators, as well as depositaries and trustees can reasonably meet their regulatory requirements from exit day. To that end, the FCA will generally require the relevant entities to continue to comply with the same rules currently applicable to them, either in the UK or, in the firms’ home state. Rather than amending each sourcebook of the FCA Handbook, the transition will be effected by way of an overarching rule in the General Provisions of the FCA Handbook (GEN). Users will have to apply this general rule when determining which rules in the FCA Handbook they will need to comply with under the TPR.
In particular, the FCA proposes that, in relation to their UK business, TP firms must comply with:
- all FCA rules currently applicable to them;
- all FCA rules which implement a requirement of an EU directive which are currently reserved to the TP firm’s home state and which therefore currently apply to EEA firms. The FCA introduces a ‘substituted compliance’ regime that would require firms to demonstrate that they continue to comply with the equivalent home state rules in respect of UK business; and
- additional rules, if necessary for consumer protection or to cover funding requirements. For instance, the FCA proposes to require TP firms to report from 1 April 2019 their client assets arrangements and prohibit tied agents and appointed representatives of TP firms subject to MiFID II from holding client assets.
The FCA does not intend to apply any home state rules that relate to capital adequacy. Firms also need to be aware of changes that have been made to the FCA Handbook as set out in the FCA’s consultation paper on Brexit: proposed changes to the Handbook and Binding Technical Standards.
It is noted that, in certain cases, TP firms may need to comply with different rules, for instance with regards to different reporting requirements.
TP firms will continue to be an authorised person under UK law and will be supervised as authorised firms. The FCA will become responsible for the supervision of the home state rules in relation to the firm’s UK business. For instance, firms will be able to issue financial promotions in (or having an effect) in the UK, without need to obtain approval by another authorised person.
The FCA will not supervise compliance with any rule that applies to the fund or the fund manager in their home state. However, fund managers will need to:
- continue updating the FCA regarding fund documents, as required currently under FSMA and the AIFM UK Regulations; and
- notify the FCA, directly, with regard to information on their fund marketing activities, rather than the home state regulator of the fund or the fund manager, as is currently the case.
Additional information for PIs, EMIs and RAISPs
The Consultation also sets outs some additional rules in respect of PIs, EMIs and RAISPs:
- As part of the notification process to participate in the TPR, PIs, EMIs and RAISPs shall notify the FCA of their existing agents which provide payment and e-money services in the UK.
- PIs and EMIs which provide payment services that are unrelated to e-money issuance will be required to establish an authorised or registered UK subsidiary to provide services in the UK when their temporary permission expires.
- PIs, EMIs and RAISPs need to notify the FCA, within a year from exit day, on whether they intend to establish a UK subsidiary, become authorised or registered or run down their UK customer contacts, in order to leave the regime.
The FCA will be receiving feedback on its Consultation Paper until 7 December 2018.