EEA financial services passports allow financial services firms authorised in their home EEA Member State to provide services to customers in other EEA Member States without the need for fresh authorisation from the host Member State. This can be through the establishment of a branch or by providing services cross-border without a physical presence.
If the UK and EU-27 enter into a withdrawal agreement, this regime will continue during an "implementation period" running from 29 March 2019 until 31 December 2020. However, in the absence of agreement, EEA firms would be unable to conduct business which constituted regulated activity after Brexit day on 29 March 2019. It is important to bear in mind that not all business conducted by financial institutions consists of regulated activity (for example, commercial lending) or that where an activity is regulated other "work-arounds" might be available such as through the UK's relatively generous Overseas Persons Exemption.
New draft legislation
To cater for the possibility of a ‘no deal’ Brexit and the likely disruption to markets as well as the huge volume of applications for UK authorisation, on 24 July 2018, HM Treasury published draft secondary legislation under the European Union (Withdrawal) Act 2018. This draft statutory instrument would establish a temporary permissions regime (the TP Regime) to enable certain EEA financial services firms to continue operating in the UK.
During this phase – which could last for up to three years from Brexit day with a possibility of extensions – these firms would be required to apply for UK authorisation when advised by the relevant UK regulator. EEA firms should consider with which UK regulator they will need to communicate - deposit-takers, insurers and larger investment firms will be dual-regulated and should apply to the Prudential Regulation Authority (PRA).
Key elements of draft
Both the PRA and Financial Conduct Authority (FCA) have published information on how it is intended that the regime will operate. Some the key elements of the TP Regime are as following:
- EEA firms able to take advantage of the TP Regime will be those undertaking regulated activities into the UK as a result of the existing EU passporting regime. Please note that payments firms and e-money issuers will be subject to separate legislation yet to be published.
- EEA firms will need to notify the PRA or FCA (as relevant) of their intention to enter the regime or submit an application for UK authorisation before Brexit. Failure to do so may result in them being unable to conduct regulated business in the UK. Clearly, they should also keep their home regulator informed in accordance with any home state requirements.
- EEA firms with UK regulatory ("top up") permissions as well as passported activities (top-up permissions) before Brexit will be required to submit a Variation of Permission application rather than an application for a new authorisation.
- Within the TP Regime firms will retain the same permissions as they had prior to Brexit, but the supervisory division between home and host state regulation will fall away. Firms will be subject to full UK supervision including rulebooks and, for example, be subject to the Financial Service Compensation Scheme and Financial Ombudsman Service where applicable. There will also be implications for client assets and the Senior Managers & Certification regime.
HM Treasury intends to finalise the draft legislation and lay it before Parliament for approval later this year. The FCA and PRA will consult this autumn on updating their rulebooks to reflect these changes as well as addressing any deficiencies in UK regulation as a result of the UK leaving the EU.
EEA firms should begin considering their options and for firms which would be authorised by the FCA complete its online survey which will help it determine which firms may seek to benefit from the TP Regime.
For a link to HM Treasury draft European Economic Passports Rights (Amendment etc. and Transitional Provisions) (EU Exit) Regulations 2018 (draft regulations) see here
For HM Treasury 's guidance on the draft regulations see here
For FCA guidance see here and for PRA guidance see here