On 24 July 2018, HM Treasury published draft regulations entitled “EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018” (the “Draft Regulations”) as part of the UK Government’s Brexit contingency plans. The Draft Regulations are intended to avoid a situation whereby, in the event of a no-deal Brexit, there is no agreed legal framework for passporting.
These regulations are draft and subject to UK parliamentary approval.
What is Proposed?
The Draft Regulations propose:
- temporary permission and recognition regimes (“TPR”) to allow EEA financial services firms currently operating in the UK to continue their activities for a 3-year period post-Brexit, with a power to extend if necessary;
- amending the Financial Services and Markets Act 2000 and other UK legislation, to remove references to passporting;
- that, when the Draft Regulations are finalised, the UK Financial Conduct Authority (“FCA”) and UK Prudential Regulation Authority (“PRA”) will update their rulebooks to reflect the changes and address any deficiencies identified as a result of Brexit;
- that eligible firms will need to submit a notification, or an application for permission or variation, to the relevant UK regulator;
- UK regulators will prescribe the requirements and conditions for making such applications, the Bank of England (“BOE”) has issued guidance and the FCA has set out in detail its proposed approach for financial services firms and investment funds, in respect of: (i) the application of the TPR; (ii) the process for EEA firms and funds to notify the FCA that they wish to use the TPR; and (iii) the FCA rules that will apply to firms in the TPR.
HM Treasury may later legislate further to introduce similar measures for EEA payment and e-money institutions, and EEA funds that are marketed in the UK, for a limited period post-Brexit. The FCA plans to publish a public consultation in Autumn 2018 in relation to the regulatory regime that will apply to firms availing of the TPR during that time period.
Timing
As with all Brexit developments, timing will be key to ensure that businesses can continue operating with as much certainty as possible. It is proposed that the Draft Regulations will be put to the UK Parliament in the coming months. If the timeframes set out in the Draft Regulations remain unchanged, most of the provisions relating to the TPR will apply from the day after the regulations come into force, with the remaining provisions taking effect on ‘exit day’, ie 29 March 2019 when the UK leaves the EU. The FCA plans to launch its notification and application process in January 2019 and complete all applications before 29 March 2019.
Conclusion
The publication of the Draft Regulations comes at a time of increasing concern around the uncertainty for regulated firms operating from the UK, and into the UK, in the absence of any formal arrangements being in place with the EU. These risks and concerns were highlighted in recent Opinions published by the European Supervisory Authorities (“ESAs”). On 31 July 2018, the Central Bank welcomed the ESA Opinions, stating;
“The ESAs’ Opinions are a timely reminder to financial institutions and in particular to banks, insurers, brokers and investment firms, to ensure they have put appropriate plans in place for Brexit. We expect that firms consider the implications of Brexit and ensure they have robust contingency measures to minimise the impact on their customers, investors and markets.’’
This client update was authored by Financial Institutions Senior Associate, Lorna Daly