If your firm is:
- a provider of financial, payment, e-money and/or account information services,
- obtained a regulatory licence in Luxembourg, Netherlands, France, Germany or another EEA state, and
- it is also providing these services in the UK (i) on a cross border basis from a location outside the UK but within the EEA, or (ii) from an establishment in the UK,
this topic will be of particular interest to you.
What are the temporary permissions and what is their purpose?
While the UK government is still scrambling to reach a deal with the EU for a smooth transition period, the UK’s financial services regulator, the Financial Conduct Authority (“FCA”), is preparing for the worst: the regulatory consequences of a ‘no-deal’ Brexit. Last week, it published a Consultation Paper outlining its proposed temporary permissions regime (“TPR”) for financial, payments and e-money services firms, registered account information service providers (“RAISPs”) from the European Economic Area (“EEA”) that currently operate in the UK under the EU passporting regime. The purpose of the TPR is to prevent passported EEA firms currently offering these services in the UK from automatically becoming unauthorised on 29 March 2019 (“Exit Day”), which could trigger chaos in one of the world’s main financial centres. As explained further, the consultation, however, does not tackle challenges to be faced by all UK regulated firms which, conversely, will not be able to benefit from their current EEA passport when offering their services in EEA states in a ‘no-deal’ Brexit scenario.
The FCA’s Consultation Paper follows on the heels of HM Treasury’s draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, published in July 2018 and laid before Parliament in September 2018. Parallel proposals were published by HM Treasury in September to establish a temporary permissions regime for payment and e-money institutions. The draft regulations, supplemented by the FCA’s proposal, will allow passported firms to continue operating in the UK for a limited amount of time while they seek full authorisation from the FCA.
How does passporting currently work?
To give some background, under the current EU passporting regime, firms that are authorised in one EEA state can provide the services for which they are authorised in other EEA states without seeking full authorisation from those other EEA states. This allows firms in the financial sector to operate seamlessly throughout the single market without duplicative regulatory barriers to entry. In practice, firms apply for a ‘passport’ with its home regulator based on the financial, payment or e-money service that they want to offer and the states that they want to offer it in. They can then either set up an establishment in the passported EEA state or provide their services on a cross-border basis (i.e. from its home jurisdiction). On that basis currently, and provided they applied for an EEA passport, regulated financial services firms from EEA states other than UK have inward access to offer their services in the UK through Section 31 of the Financial Services and Markets Act 2000 (FSMA), as amended. Similarly, e-money issuers, payment institutions, and RAISPs have passporting rights through the Payment Services Regulations 2017 (“PSRs”).
Why is passporting coming to an end?
Given that the UK has given notice under Article 50 of the Treaty on the European Union that it intends to withdraw from the EU, the current EEA passporting regime will cease to apply to the UK. While the UK and the EU have agreed in principle on an implementation period to last until the end of 2020, this has not been signed, as points of contention remain. If no deal were to be reached before 29 March 2019, and there was no fall-back mechanism for passported EEA firms to continue offering their services in the UK, there would be “risks to consumer protection and market integrity.” Thus, in the spirit of minimising disruption in the regulated markets, the UK HM Treasury prepared the draft regulations to enable a smooth transition period for EEA firms and their customers in the UK. In this context, the FCA has provided additional guidance in its Consultation Paper, specifically as to the rules that it is proposing should apply to firms under the TPR, and it is in the process on consulting on this guidance.
How can firms join the TPR?
In terms of implementation, the FCA has requested in the Consultation Paper for concerned firms to write to it before Exit Day notifying that they need to be included within the TPR. This notification should be done through the FCA’s Connect portal for authorised firms. If the FCA has confirmed to the firm that the notification has been received, its temporary permission should come into effect on Exit Day. EEA credit institutions that are intending to continue accepting deposits in the UK after Exit Day and insurers will also need to be authorised by the Prudential Regulation Authority, and must contact that regulator.
How long will the TPR last?
Temporary permissions under the TPR may last a maximum of three years, but their actual duration will depend on when the FCA requests that the firm submit its application for authorisation. The FCA has adopted a staggered process for accepting applications from firms seeking to be included in the TPR, whereby the FCA will assign ‘landing slot’ of three months to each firm in which they are expected to submit their application for authorisation. The first ‘landing slot’ period will run from October to December 2019, followed by five further landing slots that will culminate in March 2021.
Once the EEA firms passporting into the UK under FSMA, and Treaty firms (as defined under Schedule 4 of FSMA), who notify the FCA of their wish to be treated as if they have permission under Part 4A of FSMA (“TP firms”), have been fully authorised by the FCA, they will leave the TPR. They may leave the TPR by other means; they may cancel their applications if they consider that they no longer require authorisation in the UK, or their temporary permission may be cancelled if their application for authorisation is refused.
Leaving the TPR will function differently for payment, e-money institutions and RAISPs. As the explanatory information for the draft ‘Payments and electronic money (Amendments) (EU Exit) Regulations’ sets out, all payment institutions and some e-money institutions will have to set up subsidiaries to provide their services in the UK. Since these subsidiaries will not necessarily be fully operational when they receive their authorisation, their EEA parent entity will be able to continue providing services under its temporary permission for the whole of the three-year period of the TPR.
What FCA rules will apply to firms in the TPR?
In considering what rules should apply to TP firms, the FCA considered a range of regulatory responses, from applying all the FCA rules that currently apply to authorised firms from third states, to applying no additional rules to TP firms apart from the FCA rules that already apply to them as passported EEA firms. However, the former would imply too onerous a requirement given the temporary nature of the TPR, and the latter would ignore the need for appropriate consumer protections. Thus, the FCA has instead proposed a middle-of-the-road balanced approach.
Firstly, under this balanced approach, all FCA rules that currently apply to passported EEA firms would continue to apply to TP firms. Secondly, all FCA rules that implement EU directives would also apply. On this point, it is important to note that the FCA intends to accept ‘substituted compliance’, whereby the TP firm could comply with FCA rules by demonstrating that they continue to comply with their equivalent home state rules. Finally, the FCA would also apply additional rules that it considers necessary to provide appropriate consumer protection, or that relate to funding requirements. These include, in relation to financial services, for example, the Principles for Businesses (except Principle 4 on financial prudence, which would require the FCA to oversee the worldwide capital position of the business), home state rules from the Prudential sourcebook unrelated to capital adequacy, rules related to safeguarding client assets, inclusion in the compulsory jurisdiction of the Financial Ombudsman Service and the FCA’s complaints handling rules and guidance, and to require funding contributions to the Single Finance Guidance Body, the Illegal Money Lending levy, and the Financial Services Compensation Scheme for applicable TP firms.
As regards payment, e-money institutions and RAISPs, the FCA has proposed a specific approach for these firms. While most of the above-mentioned additional rules would not apply to them, they would be included in the Financial Ombudsman Service’s jurisdiction and would also be required to contribute to the Single Finance Guidance Body. Furthermore, they would be subject to additional rules considering their particular aspects. For example, some passported payment, e-money services or RAISP EEA firms currently use agents to provide their payment and e-money services in the UK. Thus, for these firms to continue to provide their services through agents in the TPR, they would have to notify the FCA of their existing agents, and those agents must appear on the FCA register. Furthermore, payment and e-money institutions in the TPR would have to comply with the safeguarding requirements of the Payment Services Regulations and E-Money Regulations in relation to their UK customers’ funds. Payment and e-money institutions in the TPR would have to provide the FCA, at its request, information to demonstrate that they have made arrangements to safeguard the funds of UK payment service users. Currently, they would need to provide such justification only to its home regulator. Finally, as discussed above, all payment institutions in the TPR, and e-money institutions in the TPR that provide payment services unrelated to e-money issuance, would have to establish an authorised UK subsidiary to provide their services in the UK. E-money institutions that only offer services related to e-money issuance and EEA RAISPs will have to be authorised or registered to continue providing services when their temporary permission ends, but they will not have to establish a UK subsidiary.
Will UK regulated firms receive a similar treatment in EEA states?
While the FCA and UK authorities can establish a temporary permissions regime for incoming passported firms from the EEA, the treatment of firms regulated in the UK who provide services on an EEA passport basis in other EEA states is at the discretion of the EU. Unfortunately for UK regulated firms that passport into the EEA, so far there has been no reciprocal treatment forthcoming from the EU for a similar regime to TPR that would allow them to continue to operate at least temporarily while seeking authorisation. As Nausicaa Delfas, Executive Director of International at the FCA has stated, “the challenges this presents, in terms of lack of commercial certainty, and business disruption, is clear.” At the EU level, the European Securities and Markets Authority (“ESMA”) issued a public statement back in July reminding UK firms wishing to relocate of the importance of submitting requests for authorisation to the national competent authorities and ESMA, which is particularly relevant to firms regulated under FSMA. However, it is important to stress that the TPR is an emergency measure to minimise disruption in the UK market in case there is no deal for an implementation period with the EU. As such, this situation could change if the UK and the EU reach an agreement that covers financial, payments and e-money services before Exit Day.
What are the next steps?
The TPR represents an effort by HM Treasury and the FCA to protect the UK market and also protect London’s position as global financial centre. For the EEA firms that are currently passporting its services into the UK, it will represent a smoother transition than having to seek authorisation immediately. With the release of this Consultation Paper, concerned firms, and specifically EEA firms with operations in the UK, should review it and consider whether they agree with the FCA’s balanced approach concerning what rules will apply to TP firms and with the specific approach proposed for payment and e-money institutions and RAISPs, in view of contributing to the conversation before the window for responses closes on 7 December 2018. Firms should move full speed ahead with their contingency planning after this Consultation Paper and determine whether they would need to make use of the TPR and notify the FCA to be included within it. In preparation for the TPR, firms should consider based on the information provided by the FCA, whether they will require a temporary permission from the FCA, to ensure that they will be able to operate seamlessly in the UK no matter what happens come Exit Day. We also hope that UK regulated firms will be given equal courtesy in the EEA states. It should be noted that the Consultation Paper is also proposing a particular approach for EEA-domiciled UCITS funds and alternative investment funds, which was not specifically discussed in this article, and which contains similar obligations.
DALIR is available to assist firms with their legal and regulatory needs regarding contingency planning as Exit Day approaches. Do not hesitate to get in contact with the team if you have any questions.