The FCA has published two consultation papers ahead of the UK’s exit from the EU (CP18/28 and CP18/29).
On March 29th 2019 the UK will leave the EU and an implementation period will begin which will last until 31 December 2020. The plan is that during this period common rules will continue to apply and access to each other’s markets will continue on current terms. However, this is still subject to further negotiations which have yet to be finalised, and there may me no implementation period at all.
Passporting is the way by which regulated firms in both the UK and the EU conduct business in each other’s states. After Brexit, passporting in its current form will end.
If there is an implementation period, then rules for firms will be clarified during that time and will apply from 1 January 2021. If there is no implementation period then the passporting regime would abruptly fall away at which point the ‘Temporary Permissions Regime’ (TRP) kicks in as a backstop. This only applies to firms passporting into the UK though, not the other way around.
There are many EEA firms and funds which currently passport into the UK, and this is what the TPR would apply to. It will allow them to continue their activities for a limited time (up to three years) after Brexit.
It should be noted that TPR regulation has been proposed to parliament but has yet to be approved, so should it be implemented, it may not be in its current form.
Firms should consider both scenarios as it is as yet uncertain what will happen with negotiations. This will particularly affect firms and funds based in the UK who conduct business in the EEA, and firms and funds based in the EEA who conduct certain types of business in the UK.
While negotiations continue it is difficult for firms to plan, but some UK firms are choosing to open subsidiary or connected entities within the EEA as a fall back should passporting abruptly fall away. Alternatively where a firm has a US or other overseas entity within its group, moving contracts with EEA firms to that entity (if possible) is something which some are exploring.
Although MiFID 2 legislation and upcoming proposed changes to FCA capital adequacy rules (covered in previous newsletters) was driven by the EU, the FCA has previously said that these rules are expected to apply in their current forms for the foreseeable future.
Until the government finalises negotiations, which appears to be something which will happen in the next month, how regulated firms will be affected is still up in the air. Until then there are only limited things firms can do to try and prepare for the various outcomes.
The FCA have prepared a short webpage outlining the main issues here: https://www.fca.org.uk/firms/preparing-for-brexit
PSPs and e-money providers
As a result of the Revised Payment Services directive (PSD2) which applied from January 2018, the industry has evolved at a rapid pace. Payment Service Providers (PSPs) and e-money issuers are now challenging more traditional players such as banks in banking related services and currency exchange services.
As PSPs and e-money providers are not subject to the same rules as banks (FSMA) a difference has arisen in the regulatory requirements between the two. The FCA proposes changes which expands the scope of PSP and e-money regulation to bring it in line with existing FMSA regulation. See CP18/21.
Open Ended investment Funds and illiquid assets
Following the result of the EU referendum in June 2016 dealing in a number of property funds was temporarily suspended as large numbers of investors tried to divest. While these funds had cash reserves, these were soon depleted, and selling illiquid assets under stressed market conditions was both difficult and potentially resulted in sales at substantial discounts. The FCA proposes some changes to provide guidance and stability in a similar situation including:
- Requiring a suspension in trading where the Standing Independent Valuer expresses ‘material uncertainty’ about at least 20% of the value of immovable assets in the scheme
- Improved liquidity management by the fund managers with oversight from the depositary.
- Improved disclosures in investor documents about liquidity risks and the impact they may have. It is also proposed to add an ‘identifier’ to the name of affected funds to draw attention to their illiquid nature.
The proposed changed are discussed in CP18/27
Making Tax Digital
Although not specific to FCA regulated entities, if your firm is VAT registered, MTD regulation potentially affects you from April 2019. This changes the way information is stored and transmitted to HMRC and may require new software. Please see our MTD newsletter for more detail.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.