Nearing the end of the transition period: Britain is open for business
In previous updates we have covered the UK Government's and the Financial Conduct Authority's (FCA's) key messages to firms around Brexit, particularly in respect of 'cliff-edge risks' that still exist for financial services firms accessing the UK and EU markets if Britain and the EU are unable to agree a trade deal and the importance of continuing to make adequate preparations.
Her Majesty's Treasury and the FCA have taken steps for a transition as seamless as possible including "On-shoring" regulation by amending legislation so that they work in a UK-only context. The FCA has also been granted Temporary Transitional Powers (TPP) to allow firms and other regulated persons to continue to comply with existing requirements for a limited period, while getting ready for compliance with the onshored UK regime by 31 March 2022.
The UK Government has stressed that Britain remains open for business and there are still options available to EU firms who have not completed their post Brexit arrangements. Over the next month, it is critical for relevant firms to assess their need for continued UK market access before the deadline, and if necessary, put in motion plans for one of the alternatives sooner rather than later.
Options for accessing the UK during transition and beyond
Financial Services Contracts Regime
The FCA established the Financial Services Contracts Regime to provide an orderly means for EEA firms that wish to wind down their operations in the UK. The regime allows these firms to run-off any pre-existing contractual obligations in the UK. While the FSCR will automatically apply to EEA firms passporting into the UK that do not choose to enter the TPR (see below), after the end of the transition period it is designed to assist firms with their exit from the UK. It is not intended for firms wishing to maintain a continued UK presence so it is of limited value to those firms who want to maintain a UK presence or access UK clients.
How useful is the Temporary Permissions Regime (TPR)?
The TPR has been designed to enable those firms, and certain types of funds, which currently passport into the UK from the EEA, to continue to operate after the end of the Brexit transition period on 31 December 2020. The TPR was created as a temporary solution to enable EEA firms passporting into the UK to continue to operate in line with their existing passporting rights for a limited period (a maximum of three years) while they seek UK authorisation. At the end of the Brexit transition period, EEA firms currently passporting into the UK, that wish to maintain access to the UK market, must have submitted a TPR notification to the FCA (by the end of 30th December 2020).
Firms wishing to make use of the TPR should note that it is only a short-term solution i.e. they should only apply for it if they intend to seek full UK authorisation after the end of the transition period.
Options for accessing the UK beyond Brexit without direct authorisation
Appointed Representative (AR) status: the most straightforward access to the UK after Brexit?
The Financial Services and Markets Act 2000 ("FSMA") establishes the principal framework for the regulation Appointed Representatives ("AR") in the UK.
The AR regime in the UK, although similar to the EEA Tied Agents Regime, offers more flexibility to entities that wish to undertake regulated activity in the UK without seeking direct authorisation. The 'EEA tied agent’ regime will cease to operate in the UK post-Brexit Transition Period.
An AR is reliant on its Principal's regulatory permission and regulatory standing for all regulated activities that AR is able to undertake in the UK. Principals retain regulatory responsibility for the AR and it is therefore vital that the AR is willing to be subjected to regulatory scrutiny by the AR Principal(s).
The Appointed Representative regime can be an efficient way to provide regulated investment services without the cost or regulatory burden of direct authorisation.
Third Party Processors
Another possibility for firms wanting to maintain a presence to undertake certain insurance distribution activities could be to act as a Third Party Processor (TPP). A TPP is essentially a hybrid of an outsourced service provider and an AR. We have worked through this option with a number of clients and if specific criteria can be fulfilled in respect of the interaction between partners and customer communications, this is another viable channel for firms to consider and can potentially be quickly executed based upon the reconfiguration of existing relationships that firms may already have in place.
Exemptions and Exclusions
Another possibility that allows certain regulated activities to be undertaken by firms in third countries is the Overseas Person Exemption (OPE).
However, the application of the OPE varies widely dependent upon the regulated activity (or activities) in question. Therefore, a detailed analysis is required to understand if the OPE can be utilised by firms on a case-by-case basis.
It should be noted that there are potential regulatory risks involved in utilising the OPE route, both from the perspective of misinterpreting the complex and nuanced conditions of the exclusion but also, on an ongoing basis, in terms of accidentally undertaking regulated activities beyond the limited scope of the exclusion.
Reverse solicitation may also be a viable means for firms to undertake business 'in' the UK post-31 December. However, reverse solicitation application needs to be worked through and has its complexities too that must be considered carefully by each firm on a case-by-case basis.
Firms considering this route should contact us to review the regulatory, legal and GDPR related considerations to both the OPE and reverse solicitation prior to adoption.
The UK regulatory regime can be flexible and offer non-UK firms various options for maintaining or obtaining access to the UK financial markets and clients.
Time is certainly of the essence for all those still wanting to do business in the UK. However, put simply, there will only be two types of regulated firm in the UK on 1 January 2021: those that are ready for the post-Brexit world and those that are not.
How can we help?
With just weeks remaining to the deadline and the Withdrawal Agreement as yet unsigned, now is the time to act.We have worked with clients to deal with a number of eventualities. These include:
- Brexit Scenario Analysis – To tell you how aspects of your business will be impacted in the event of 'No-deal'.
- Brexit Impact Assessments - We can undertake holistic analysis for individual firms, considering the range of possible eventualities, under a Withdrawal Agreement.
- Brexit Strategy Planning – After undertaking analysis, we can assist with informing and implementing your Brexit strategy, to mitigate the impacts of Brexit, mitigate client detriment and manage commercial disruption.
- TPR Notification Support for In-bound Firms – For Non-UK firms that currently rely on passporting, we can help you submit your TPR notification to the FCA, as well as supporting you in understanding what it means to operate in the UK under the TPR, and as a fully authorised UK firm. This includes support with FCA authorisations.
We can also provide ongoing compliance support, to provide assistance in managing your firm's ongoing regulatory obligations – either as a fully authorised firm or a third-country branch. For further details, please contact us.
Please contact Charlie Baillie or Andrew Jacobs to speak with us about your specific queries or requirements.