The Financial Conduct Authority (FCA) has set out details of its temporary permissions (TP) regime, which will apply to EU and EEA firms after Brexit, in a consultation paper published on 10 October. It coincides with a separate Brexit consultation outlining plans to ‘onshore’ a vast number of EU regulations directly into its handbook, including Ucits and Mifid rules, in case a transition period is not agreed.
Temporary permissions window for funds
Firms and funds will be able to apply for temporary permission from early next year and the regime will come into force on 29 March 2019, ie on Brexit day.
At an unspecified time during the three-year period, funds will then be given a three-month application window or ‘landing slot’ to apply for full authorisation.
The TP regime will require firms to meet all UK rules that currently apply to them and “substantial compliance” with all FCA rules that implement an EU directive requirement.
They may also have to apply “certain additional FCA rules necessary to provide appropriate consumer protection or that relate to funding requirements”.
FCA aims for smooth Brexit process
The UK regulator does make it clear that it is seeking to ensure as smooth a process as possible, even in the event of a hard Brexit.
It said: “When considering the application of rules to the UK business of TP firms, our intention is to preserve the status quo as far as possible in terms of the requirements that TP firms and operators, depositaries and trustees of EEA-domiciled investment funds will need to meet in respect of their UK business.”
The FCA paper said that if firms are unsure whether they need a temporary permission they should seek expert legal advice, warning that operating as an unauthorised firm is a criminal offence.
In terms of financial promotions for funds, the paper added: “Marketing of relevant investment funds in the UK is not a regulated activity, though it is subject to the restrictions on financial promotions.
“It is our view that a non-UK-domiciled fund will always need to be either recognised under Section 272 of the Financial Services and Markets Act 2000 or registered under the national private placement regime to be marketed in the UK after exit day.
“So, each relevant investment fund will need temporary permission to continue marketing in the UK after Brexit before registration/recognition.”
The regulator expects the notification process for a temporary permission to operate through its Connect system, with a confirmation email being sent when a notification is received.
The notification window will open early in 2019 and close before exit day.
Once the window has closed, firms that have not submitted a notification will not be able to use the TP regime.
Firms in Gibraltar do not need to seek temporary permission but can continue to passport into the UK.
FCA could ‘onshore’ EU rules
The plans to ‘onshore’ EU regulations would come into force in the UK handbook after 29 March 2019 with the proposed changes including detailed handbook amendments outlined in a consultation paper published on 10 October 2018.
The FCA notes that various changes may not need to come into force immediately after March if there is a withdrawal agreement with the EU which includes a transition period.
The main areas covered are prudential rules for firms regulated only by the FCA; conduct of business rules; rules for UK funds and fund managers covered by EU fund management legislation, including Ucits and AIFMD; and rules affecting other market participants, including UK investment firms covered under EU markets legislation, including Mifid.
The FCA also notes that most of the changes depend upon the provisions of the European Union Withdrawal Act, which is still to reach the statute book.
The changes to the handbook, referred to as onshoring, are governed by statutory instruments and so do not require the FCA to carry out a cost benefit analysis as it does with many other significant regulatory changes.
The FCA also notes the HM Treasury position which says that, if there is no withdrawal agreement, the UK cannot rely on any specific arrangements being in place between the UK and the EU.
It warns that the EU and its member states would theoretically be treated in the same way as non-EU or third countries after exit day because “the UK would be outside of the EU framework for financial services and would be a third country to the EU and its member states”.
However the paper adds: “The Treasury has made clear that there are instances where it will diverge from this approach to ensure that there is a functioning regime in place on exit day to enable firms and regulators to be ready for exit, to protect the existing rights of UK consumers or to ensure financial stability”.