Brexit: The Temporary Permissions Regime- what does it mean for firms?

14 September 2018

As the Brexit negotiations continue to progress, financial services firms are putting contingency plans into effect for a no deal Brexit in March 2019. Recent weeks have also seen more activity from the UK Government to prepare for the possibility of no deal. As part of this the Government has started to publish a series of draft statutory instruments (SIs) which would provide the UK with a workable financial services regulatory framework in March 2019 should the UK and EU-27 not reach an agreement. The intention of the SIs is not to make policy changes to the regulatory regime currently in force in the UK through EU regulations, but to provide continuity for the sector. Importantly if there is an agreement between the UK and EU, including on a transitional period, then the SIs will no longer take effect although some of the policy decisions included in the SIs (such as the allocation of powers from EU to UK regulators) may continue to apply after the transitional period, if there is an agreement.

In a series of blogs we will explore some of the key issues for financial services firms from the SIs. In this first blog we examine the first SI published by the Government: the proposal to create a temporary permissions regime (TPR) for EEA firms providing financial services in the UK through passporting.

While at this stage the TPR represents a contingency measure, firms should be aware of its implications.

Many EEA financial services firms undertake activity in the UK on a cross border basis or through a branch using passporting rights. If no agreement is reached between the UK and EU, these rights would fall away at the end of March 2019 and these firms would not be able to legally provide services in the UK. To avoid the disruption this would entail the Government has announced that it will legislate if necessary to create a TPR which would allow firms to continue providing the same services (but not different or additional ones) after Brexit, prior to being authorised.

The TPR is intended to run for three years after the UK leaves the EU  (29 March 2019) and the period the regulators have to decide on an application once submitted by a firm in the TPR has also been extended to three years. Once authorised, firms will leave the TPR. Those firms that do not seek or are denied authorisation, will have their permissions cancelled and there will be an orderly run off of their activities in the UK. To enter the TPR firms should notify the relevant regulator (the FCA or PRA) of its intention to enter the TPR before 29 March 2019.

If there is a deal with a transitional period, then EEA firms operating in the UK will, until the end of 2020, operate under the same regulatory regime that they do now with the balance of supervisory powers being with the home state regulator. But under the TPR, EEA firms will be treated in the same way as UK authorised firms. So for example a branch of an EEA bank or insurer will face the same regulatory treatment that is currently applied to a US or Japanese branch.

What does this mean for firms? In a number of areas third country firms face more intense regulation than EEA firms, for example under the SM&CR and CASS. Third country firms also come into scope of the FSCS and macro-prudential measures (such as LTV caps). While the SI provides the regulators with scope to phase in these additional regulatory requirements, firms should start thinking about the potential for more onerous regulatory and supervisory requirements.

EU regulation often constrains the supervisory powers of host regulators, particularly for prudential supervision. Once these constraints fall away, EEA firms may find that they face more intense scrutiny, requests for information and general challenge from supervisors. Supervisory scrutiny is likely to be particularly pronounced under the TPR as firms will only enter the TPR if there is no deal between the UK and EU, meaning regulatory relationships may be strained. The PRA has already indicated in its risk appetite for branches that its approach to supervision will depend on the degree of supervisory cooperation with home state regulators.

At this stage the TPR is being treated as a back-stop measure. But, as with all aspects of Brexit, it is prudent for firms to prepare for all eventualities, including entering the TPR in March 2019. Firms that will not be authorised prior to March 2019 should notify the regulators of their intention to take advantage of the TPR and begin to consider the implications of the additional regulatory burden this would entail

 

Andrew Gray

Andrew Gray | Partner
Profile | Email | +44 (0)20 7804 3431

Connor MacManus

Connor MacManus | Senior Manager
Profile | Email | +44 (0)20 7213 8555

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