FCA launches consultation on temporary permissions regime for inbound firms and funds

In tune with previous announcements, the UK Financial Conduct Authority (FCA) has opened a consultation on its plans to introduce a temporary permissions regime for inbound firms and funds.

The temporary permissions regime will allow EEA firms and funds to continue regulated business in the UK, if the UK leaves the EU in March 2019 without an implementation period in place. The relevant consultation paper, published earlier today, sets out how the FCA expects the regime to work in practice, how firms and funds can enter it, how long it will operate for, and the proposed rules should apply to firms and fund marketing activities during the regime.

Let’s recall that, in March 2018, the UK and the EU agreed the terms of an implementation period, which was included in the draft withdrawal agreement. During this period, set to start on March 29, 2019 and last until December 31, 2020, EU law and consumer rights and protections will continue to apply in the UK. During this time firms and investment funds will continue to have access to the same passporting arrangements as they do now.

However, the implementation period is subject to further negotiations between the UK and the EU. To be ready for all scenarios, the FCA has put the necessary arrangements in place for it to continue to meet it statutory objectives and reduce harm should the withdrawal agreement not come into effect.

Under these circumstances, once the UK has left the EU, reciprocal market access would no longer be available through the passporting arrangements between the EU and UK for firms and investment funds. The UK would become a ‘third-country’ and EEA-based firms might need to seek authorisation in the UK to continue to access the UK market and EEA-domiciled investment funds would need to seek recognition in the UK to continue to be marketed there.

A temporary permissions regime (TPR) for inbound passported firms and investment funds is set to enable them to continue their activities in the UK for a limited period after Brexit.

Generally, TP firms – EEA firms passporting into the UK under FSMA, and Treaty firms, who notify the relevant regulator of their wish, will need to continue to comply with the rules which currently apply to them based on the activities they carry on, either in the UK or in their home state.

The FCA proposes that operators, depositaries and trustees of EEA-domiciled investment funds should generally continue to comply with the same rules that apply to them now in the UK. However, the regulator does not propose to take on responsibility for supervising rules that apply to an investment fund or its manager in their home state.

If there is no implementation period and a firm has notified the FCA that it needs a temporary permission, the permission will come into effect on exit day. A temporary permission will last for a maximum of 3 years, but the period will vary from firm to firm depending on when they are asked to submit their application for full authorisation in the UK and subsequently leave the TPR. Once in the TPR, firms will be given an application period or ‘landing slot’ to submit their application for full UK authorisation.

Firms will need to notify the FCA that they want a temporary permission. The UK regulator expects notification will be an online process using the Connect system and it will confirm by email that a firm’s notification has been received. The FCA will publish information on how to complete the notification process.

The UK regulator expects to open the notification window in early 2019 and it will close before exit day. Once the notification window has closed, firms that have not submitted a notification will not be able to use the TPR.

In most instances, firms within TPR will be supervised in the same way as other authorised firms Where firms cause harm or pose a significant risk of causing harm, the FCA may use its regulatory tools. For example, the FCA can vary a firm’s permission or impose a requirement.

The FCA does not propose to apply any home state rules which relate to capital adequacy (including both capital resources and liquidity resources) and related requirements. Otherwise, the regulator would have to oversee the firm’s worldwide capital position, rather than just supervise it in respect of its UK business. However, the UK regulator proposes to continue to apply to a TP firm rules relating to capital adequacy which would apply to that firm immediately before exit day.

The general approach also seeks to apply certain directly applicable parts of MiFID II to TP firms. In implementing MiFID II, the FCA included a rule to apply the directly applicable parts of MiFID II to UK branches of firms based outside the EEA who are authorised in the UK and conduct investment services and activities. These provisions will apply to EEA firms with branches in the UK. However, while in the TPR, based on a similar approach, TP firms undertaking investment services and activities will have to comply with certain specified technical standards made under MiFID II, but in this case the FCA proposes that substituted compliance with home state requirements will be possible.

With regard to protection of client assets, the FCA notes that, currently, this is a home state matter for incoming EEA firms. Once these firms enter the TPR, the FCA will become the relevant regulator for client assets protection in respect of UK business.

The UK regulator proposes to require TP firms to report to it their client assets arrangements. The frequency of the reporting will depend on the TP firm’s business type and size of client assets holdings. Under the proposals, TP firms must report to the FCA at the same frequencies and within the same submission deadlines for FCA-authorised firms.

The FCA also plans to address the potential harm of some customers losing compensation scheme protection by providing consumers with access to the FSCS. Customers of EEA branch firms in the TPR (i.e. firms with a UK establishment) will have FSCS protection. This will provide cover equivalent to that available for customers of other UK authorised firms.

The consultation period is eight weeks. Interested parties are invited to provide comments by December 7, 2018.