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This publication is available at https://www.gov.uk/government/publications/temporary-permissions-regime-for-firms/eea-passport-rights-amendment-etc-and-transitional-provisions-eu-exit-regulations-2018-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives ministers powers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury (HMT) is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than reflect the UK’s new position outside the EU, and to smooth the transition. The majority of the changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The draft SI will amend references to EEA passporting rights in domestic legislation, which will become deficient as a result of the UK’s exit from the EU. The SI will also implement a ‘temporary permissions regime’, following the government’s announcement on 20 December 2017 that it would put forward such legislation to enable EEA firms and funds operating in the UK via a financial services passport to continue their activities in the UK for a limited period after exit day in order to allow them to obtain UK authorisation or transfer business to a UK entity as necessary. The drafting approach of the SI, and other technical aspects of the proposal, may be subject to amendment before the final instrument is laid before Parliament. This will include, for example, the addition of provision on the continuity of taxation, which will not affect the design or operation of the temporary permissions regime.
HMT is publishing the draft SI with this accompanying explanatory information, ahead of laying in the autumn, to provide stakeholders with further information regarding the design of the temporary permissions regime.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
The EEA financial services ‘passporting’ system enables financial services firms authorised by the regulatory authorities in their home EEA member state to provide their services to customers in any other EEA member state without having to obtain authorisation from the other member states’ regulatory authorities.
The UK’s participation in the passporting system and EU Treaty-derived inward access is implemented via Section 31(1)(b) and (c), Schedule 3, and Schedule 4 of UK’s Financial Services and Markets Act 2000 (FSMA). These provisions of FSMA are referenced in other pieces of legislation that concern EEA firms performing regulated activities in the UK using a passport and UK firms that perform regulated activities in the EEA using an EEA financial services passport (hereafter referred to as a “passport”).
3.2 Deficiencies this SI remedies
The passporting system relies upon a legal framework agreed between EEA member states and implemented in their domestic legislation. If the UK leaves the EU without a deal, there will be no agreed legal framework upon which the passporting system can continue. As a result, any references in UK legislation to the EEA passporting system will become deficient at the point of exit. To correct this, Part 2 of the SI makes provision to repeal Section 31(1)(b) and (c), Schedule 3, and Schedule 4 of FSMA, and the Schedule of the SI amends the provisions of domestic legislation that reference Section 31(1)(b) and (c), Schedule 3, and Schedule 4 of FSMA.
In the absence of further provision, these repeals would mean that any EEA firms currently operating in the UK via a passport would lose their permission to do so on exit day. As a result, the firm would not be able to continue to carry on regulated activities in the UK, with consequent harm to UK businesses and consumers. Firms needing permission would have to seek authorisation from the UK’s regulatory authorities—the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)—if they wish to continue providing services to customers located in the UK. As a consequence, the volume of applications for UK authorisation received by the PRA and the FCA is expected to increase significantly as many hundreds, perhaps thousands, of EEA firms submit applications for UK authorisation. This volume of applications—some of which are expected from firms that already have a substantial UK presence and complex business models—will be unprecedented.
As a result, on 20 December 2017 the government announced that it would put forward legislation to establish a ‘temporary permissions regime’, enabling EEA firms and funds operating in the UK via a passport to continue their activities in the UK for a limited period after exit day. The SI sets out the design and structure of such a regime for EEA firms and gives powers to the regulators to deliver it in accordance with their statutory objectives.
The regime is designed to minimise the disruption faced by EEA firms and UK businesses and consumers due to the loss of passporting rights arising from EU withdrawal and will ensure that:
- firms can continue to carry out business as before, writing new contracts and servicing existing contracts entered into before exit day for a temporary period after exit day
- firms have appropriate time to prepare for and submit applications for UK authorisation and complete any necessary restructuring
- the PRA and the FCA can manage the expected applications for UK authorisation from EEA firms that were previously operating in the UK via a passport in a smooth and orderly manner
To enter the regime, prior to exit day eligible firms will either need to submit an application for UK authorisation or a notification of their intent to enter the regime, as set out in Chapter 4 of Part 3 of the SI. The regulators will provide further details to firms on how and when to do this. Once a firm is in the regime, it can be directed by the relevant regulator to make an application if it has not already done so within two years from exit day.
Chapter 2 of Part 3 of the SI makes provision treating firms in the regime as if they were fully authorised in the UK, enabling them to carry out regulated activity as before, writing new contracts and servicing existing contracts entered into before exit day. The scope of this activity will be limited to the scope of regulated activities each firm was permitted to carry on immediately before exit day under their passport. To enable EEA firms entering the regime to transition to UK rules, HM Treasury plans to give the regulators powers to phase in UK regulatory requirements.
All firms in the regime with an establishment in the UK will have membership of the Financial Services Compensation Scheme (FSCS). Like any other member of the FSCS, these firms will be required to pay the FSCS levy that funds the scheme. Firms in the regime without an establishment in the UK will be outside of the scope of the FSCS until they set up such an establishment in the UK. There is an exception to this: EEA insurers that currently operate in the UK via a passport but without an establishment here already have FSCS membership as do certain EEA-based fund managers who are managing UK-authorised funds. In the temporary permissions regime, these firms will retain their existing FSCS membership and will continue to be required to pay the levy. This is set out in Part 4 of the SI and more details on FSCS membership for firms in the regime will be set out by the regulators and in their rulebooks in due course.
Part 4 of the SI also provides the regulators with the discretion to choose to treat individuals to whom the Senior Managers and Certification Regime (SMCR) applies as having been granted approval from a time stated in a notice until their firm comes out of the temporary permissions regime, pending a decision on approval. It also makes provision to treat insurance firms’ existing supervisory approvals under Solvency II, originally granted by their home EEA state regulator, as granted by the relevant UK regulator whilst the firm is in the regime.
In line with the duration of the regime, Chapter 1 of Part 3 extends the deadlines by which the PRA and the FCA have to make a determination on an application for authorisation (including for a variation of permission) from EEA firms operating in the UK via a passport to up to three years after exit day. Part 4 of the SI mirrors this extension for any applications for approved persons made under the SMCR and supervisory approvals under Solvency II. Chapter 6 of the SI provides HMT the power to extend both the length of the regime and these deadlines—by no more than 12 months at a time—in certain circumstances.
As set out in Chapter 5 of Part 3 of the SI, firms whose applications are successful will immediately become fully UK authorised and leave the regime. However, firms whose applications are unsuccessful, firms that do not submit an application by the allotted deadline, or firms that withdraw their applications without submitting another will be eligible to have their temporary permissions cancelled by the PRA or the FCA. Provision will be made for them to wind down their UK regulated activities, including any outstanding contractual obligations, in an orderly manner in a separate statutory instrument, to be laid before parliament at a later date.
Similar temporary regimes (lasting three years with a power to extend if necessary) will be provided for EEA payment institutions, EEA electronic money institutions, as well as EEA funds that are marketed into the UK. More information on these regimes will be set out in the policy notes that accompany the relevant draft SIs.
3.3 Relevant rulebook and binding technical standard changes
The FCA and PRA will be updating their rulebooks to reflect the changes introduced through this SI (among others), and to address any deficiencies as a result of the UK leaving the EU. The FCA and PRA have confirmed their intention to consult on these changes in the autumn.
The key stakeholders are EEA financial services firms that currently operate in the UK via a passport. Additionally, the UK clients and customers of these firms will have an interest.
4. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.