21 December 2020

Passporting after Brexit: options for financial services firms

Sectors:

Financial Services

Services:

Auditing

With the transitionary period following Brexit coming to an end on 31 December 2020, the way in which financial services firms operate between the UK and Europe is about to change. Passporting after Brexit will no longer exist.

There are question marks over how regulation will take place, and what firms must do to continue operating and marketing their financial services in each different member state across the European Economic Area (EEA). Chris Evans runs through the options for EEA firms looking to trade with the UK, and offers some reminders for FCA-registered UK firms to add to their to-do list.  

 

In terms of FCA-registered firms, what does passporting mean?

Passporting is the ability to operate or market your services in other European Economic Area (EEA) states without additional authorisation in each country. European countries are equally able to operate in the UK. This passporting regime is something that’s evolved over time for different services under different EU Directives, and it’s something that most financial firms are used to.

So, for example at present, a US company only needs to open one EEA authorised firm which could then passport across the EEA area, using the passporting regime. The bad news is that all this is about to change, once the UK end the transitionary period of Brexit and finally ends operating under the EU rules from 31 December 2020 onwards.  

 

How will the passporting rules change from 1 Jan 2021, once Brexit has happened?

We’re still talking about how Brexit will work, even now, and negotiating what the final deal will be. As I write this, the result is looking like a no-deal situation but the transitional period ends at 11pm on 31 December 2020, whatever happens. It’s fairly clear that the passporting regime is going to end – and that’s something most firms will have been aware of for a while.

However, what’s happened is that the Treasury has given regulators and the Financial Conduct Authority (FCA) some Temporary Transitional Powers. This allows the FCA to offer transitional options to firms until March 2022. We can’t anticipate the exact outcome of Brexit, and we won’t know the details until a deal (or no deal) is agreed. But these transitional powers are there to make sure the transition is as smooth as it can be – and that consumers still have the protections they need.

Also introduced is the Temporary Permissions Regime (TPR), which will be key to post-Brexit operations. The regime allows European Economic Area (EEA) firms to register with the FCA and to continue trading in the UK. It’s widely known within the industry that this exists, but I remind firms that they need to submit their notification (via the Connect system) by 30 December 2020 if you want to take this route. This doesn’t leave much time, but it may be a vital move for EEA firms wanting to continue their financial services operation in the UK.  

 

What action can EEA firms take to continue operating?

For EEA firms wanting to continue operating in the UK, the outlook for 2021 and beyond is more clear. There are several ways to overcome the hurdles. If you’re a EEA firm that wants to operate in the UK, you can:

  1. Apply to the FCA for UK authorisation – by applying for authorisation by the FCA, you give your firm a long-term, stable opportunity to provide financial services within the UK market, with all the relevant FCA compliance and governance. This may take several months.
  2. Use the Temporary Permissions Regime (TPR) – by applying for the TPR, you can make use of these temporary FCA powers to continue operating in the UK in the short term. However, this is only a temporary measure essentially designed to avoid a cliff-edge whilst your firm applies for full FCA authorisation.
  3. Use the ‘Financial services contracts regime’ – the financial service contracts regime has been introduced for EEA firms that want to exit the UK market. If you wish to withdraw from the UK, this regime allows you to wind things down, run off your contracts and close down your operations in an orderly manner.

In the short term, for EEA firms operating in the UK the regime will operate without too much change to way that it does now, but you do need to consider what your options are. The temporary regime is just that – temporary. So a more long-term plan is needed.

The temporary regime is there to allow things to carry on without too much hassle, but it’s important to start the application process for permanent regulation. However, UK firms that want to operate in Europe post-Brexit will know that the regime ends on 31 December 2020 (and if you don’t, you really should by now!). Most firms will therefore have considered how they are going to continue to operate. In particular, EEA regulators have not offered reciprocation to the Temporary Permissions Regime and therefore it’s a bit late to act if you haven’t already.  

 

Will the post-Brexit regime affect the attractiveness of the UK?

Within the financial services sector, there are concerns around the fall-out from a post-Brexit regime, and the potential impact on the attractiveness of the UK as a financial hub. My personal viewpoint is that the UK will come out of this looking ok.

The UK is still the financial services centre of Europe, at the moment, so it remains to be seen what the economic impact will be. The UK will still be an attractive proposition for firms wanting to connect with the US, Australia, Canada etc. – we’re still that gateway to the finance world for many European nations. There is also the opportunity to strengthen ties and do deals with other financial global centres. Does it make the UK look less attractive to non-EU countries?

You won’t be able to passport to Europe from the UK, so it may make the UK less attractive if you wanted one European base for a US firm etc. Most firms will already have considered this and are well aware that passporting will be ending.  

 

Are there other FCA-related requirements to be aware of?

The end of passporting isn’t the only item that financial services firms should be aware of. Alongside the fallout from Brexit, there have also been changes to some FCA deadlines, due to the increasing impact that COVID-19 is having on the running of the UK regime.

  • Deferral of the IFPR deadline – the new UK Investment Firm Prudential Regime (IFPR) relates to the new capital requirements rules and was due to come in by June 2021. This has now been pushed back to January 2022. The FCA consultation is on the FCA website if you wish to contribute before February.
  • Reviewing your systems and data – once the IFPR does begin, how you measure risk will change and K factors will be introduced for some firms. How you record and track the data will be important and you need to review whether your systems are really going to be capable of dealing with the increased analysis and flexibility that’s required. The period against which some K factors will be measured has already started.
  • Operating under two different regimes – The UK had played a huge role in designing the new regulatory regime for the European financial sector. So, bearing this in mind, it’s unlikely that our rules will be that different to the EU implementation post-Brexit. However, due to the deferral of the implementation date there will actually be a six-month period where the UK is operating under the old rules and the EU is operating under the new rules – meaning that your firm may have two completely different regimes to comply with.
  • Deferral of the deadline for the Senior Managers and Certification Regime – the Senior Managers and Certification Regime was introduced for senior nominated staff within the firm. The deadline for solo regulated firms to have undertaken the first assessment under their certification was 9 December 2020, but the good news is that this deadline has been pushed back to 31 March 2021. This was a legal requirement, so this extension throws you a lifeline.

 

How can Haines Watts help your EEA firm prepare?

If you’re an EEA firm wanting to make use of the temporary permissions regime, or wanting to apply for full registration, Haines Watts can help you to get ready for this. Our FCA specialists will:

  • Talk to you about the best routes to take, post-Brexit, and what the options are
  • Point you in the right direction and provide the support you need
  • Put you in touch with third-party specialists who can help with your notifications.

You won’t be able to use the passport regime from January onwards, so it’s important to be aware of the FCA options, the notification requirements and which route will be most beneficial.  

 

Get in touch to talk through your post-Brexit passporting options.

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