Brexit update for financial services firms - week ending 2 November 2018

United Kingdom

The week in outline:

UK contingency planning for a non-deal scenario continued this week with more material on ‘Nationalising the Acquis’ (NtA) under the European Union (Withdrawal) Act 2018 (EUWA). HMT published 5 new NtA statutory instruments (see Documents 2 to 5 below). We commented on the NtA SIs dealing with the onshoring of the AIFMD and UCITS regimes in our update for the week ending 12 October 2018; further SIs were published this week dealing with Venture Capital and Social Entrepreneurship Funds (see Document 2 below). Sarah Rapson’s speech (see Document 1 below) gave FCA’s perspective on how the temporary permission regime would work. There is also ‘no deal’ planning for the competition regime; the relevant HMT NtA SI has been laid before Parliament (see Document 4 below) and the Competition and Markets Authority (CMA) published material on how they would deal with merger and anti-trust cases and how state aid regulation would operate. The key message is that substance of current rules would be maintained (see Document 6 below).

There were reports in the UK press of a breakthrough in the EU/UK negotiations with a deal being agreed for financial services (FS). In our view these reports painted a misleading impression of what the UK has achieved in the negotiations and recycle inaccurate ‘spin’ about the success of the UK Government (HMG). As we have explained in previous updates, the UK’s Chequers proposals/White Paper (WP) on the future relationship abandoned the previous proposals for a bilateral treaty giving preferential DRC[1] access to EU (and UK) FS markets (see our update for week ending 13 July 2018). In order to support the WP proposals for a single market solution in goods, the UK gave up any preferential access ambitions and accepted the EU’s opening position on FS, namely that the UK DRC/access to EU markets would be limited to that available to other third countries and that the EU would continue to act ‘autonomously’. The WP had proposals for bilateral treaty arrangements for structures on cooperation and coordination, but the EU has made it clear that these will not undermine the EU’s principle of autonomous action in third country relations, and certainly will not open the door to preferential access.

At this point, the negotiations only concern the non-binding political declaration on the ‘framework for the future relationship’ (to be annexed to the Withdrawal agreement (WA)); the FTA/ trade treaty covering FS will not be negotiated until after exit. Given the extent of HMG’s public retreat on FS, therefore, it should be relatively straight forward for the current negotiations to agree the relatively brief description of the framework for the future relationship in FS. One can imagine both sides including general words about cooperation and coordination and for the EU to be happy to include positive sounding words on the structures and procedures proposed by the WP.

After the reports, Michel Barnier summarised the position in a tweet - “Misleading press articles today on #Brexit & financial services. Reminder: EU may grant and withdraw equivalence in some financial services autonomously. As with other 3rd countries, EU ready to have close regulatory dialogue with UK in full respect for autonomy of both parties.

From the perspective of UK FS firms, since the WP there have only been two important issues remaining –

  • the risk of a no-deal exit where the EU is still refusing to match the transitional regime which the UK is putting in place for EU-27/EEA firms doing business in the UK (see our update for the week ending 24 August 2018); and
  • the question of how the EU will develop its FS legislation on equivalence based third county DRC in the light of Brexit. Most of the current provisions do not provide any ‘access’ for third country firms which is very limited in scope (and one of the main provisions – under MiFID II - has yet to be put into operation). The EU may both tighten some aspects restricting DRC/access (as it is proposing for third country CCPs) and possibly also extend EU harmonisation with limited DRC/access provisions in some new sectors. This may not emerge for some years yet, and any UK influence on the process may not be seen until the end of the trade negotiations.

     

1. FCA: Speech by Sarah Rapson: An update on our approach to authorisation and our brexit preparations

Text of this speech, given on 2 October 2018, has now been published. The full text can be accessed here.

“Firms will need to notify us that they want a temporary permission. Fund managers will also need to notify us of which of their stock of passported funds they wish to continue to market in the UK temporarily. Both will notify us via a simple process, using our Connect system.

If the regime is required, we will open the notification window in early 2019 and it will close just prior to exit day. We will communicate widely when the notification window opens but it is important for me to stress that firms and fund managers must notify us in good time. This is crucial and I cannot stress it strongly enough. The legislation does not permit us to accept latecomers. Once the window closes, it is closed for good.

Once in the regime, firms and fund managers will be given a ‘landing slot’ to submit their application for UK authorisation or recognition. We hope to allocate the landing slots quickly once the regime is operational with the first of these starting later in 2019. This will allow those in the first slot plenty of time to prepare their applications. We expect the regime will operate for three years with the last landing slot in early 2021.

In terms of a firm’s status, once in the regime, firms will be temporarily authorised to undertake the regulated activities covered by its passport in the UK as if it had sought and obtained authorisation under Part 4A of FSMA. The firm will continue to be an authorised person for the purposes of UK law.

This means that our powers under FSMA will continue to apply to the firm but will also cover matters which were previously handled by the firm’s home state. For example, for business carried out in the UK, we will have responsibility for supervising the firm. We will also be able to impose requirements on firms, and our Handbook will apply to firms in the regime.

With regards to EEA UCITS (Undertakings for Collective Investments in Transferable Securities), each individual fund or sub-fund will be temporarily recognised to allow it to continue to be marketed to retail investors in the UK.

EEA AIFs (Alternative Investment Funds) will be able to be marketed in the UK for a temporary period on the same basis as they were before exit.

We have spent a great deal of time thinking about which rules should apply to firms and funds in the regime. We have tried to balance a number of factors, including: ensuring appropriate consumer protections continue; firms in the regime can comply with our requirements from exit day; and ensuring that we can effectively supervise firms during the temporary regime.

We are also mindful of the fact that the regime is, by definition, temporary and should offer a bridge to the full UK regime that will apply when leaving the regime.

We will consult on our proposals in detail in the very near future.

Throughout this work, with consumer protection at the front of our minds, we have engaged with the FCA Consumer Panel and other bodies to ascertain their concerns and respond to them accordingly. As part of the onshored legislation, we are seeking to maximise continuity for consumers to the extent that it is possible. The temporary permissions regime will work to remove any interruption of service to consumers of EEA firms.”

2. HMT: Draft EU Exit SIs for investment funds and their managers

Draft SIs and explanatory information have been published by HMT in this document. Information on the following SIs appear in this link: Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018. Updated information on the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 and the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018 also appears here.

The explanatory notes for the Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018 can be accessed here and state the following:

“The UK-version of the EuVECA, EuSEF and ELTIF Regulations will only apply to UK Alternative Investment Fund Managers (AIFMs) and funds domiciled in the UK. As a result of changes made by the SIs, UK fund managers will be able to register or be authorised with the FCA in order to market qualifying social entrepreneurship funds, venture capital funds and long-term investment funds within the UK, under the “Social Entrepreneurship Funds” (SEF), “Registered Venture Capital Funds” (RVECA) and “Long-term Investment Fund” (LTIF) labels respectively.

Existing UK managers of EuVECAs, EuSEFs and ELTIFs that are already registered or authorised with the FCA, will be automatically transferred to the new UK regime.

EU legislation currently sets out the investment rules for EuVECA, EuSEFs and ELTIFs, which can only invest in eligible assets as defined by the relevant regulations. In some cases, EEA assets are given preferential treatment over third country assets, with the EuVECA, EuSEF and ELTIF regimes making a distinction between investment in EEA member states and investments in the rest of the world. To ensure continuity for investors, this SI will maintain the existing investment rules for EuVECA, EuSEFs and ELTIFs domiciled in the UK.

[…]

To ensure that UK investors have continued access to EEA funds that are currently marketed in the UK, the government announced on 20 December 2017 that it would put forward legislation to establish a ‘temporary permissions regime’. This would enable EEA funds that have notified their intention to market in the UK via a passport before exit day to continue to access the UK market for a limited period after exit day. The regime will last for three years from exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances. The Alternative Investment Fund Management (Amendment) (EU Exit) Regulations 2018 sets out the design and structure of such a regime for all EEA AIFs, including EuVECAs, EuSEFs and ELTIFs.

3. HMT: Draft Payment Accounts (Amendment) (EU Exit) Regulations 2018

HMT has published this draft SI along with an explanatory note. The draft SI can be accessed here and the explanatory note here.

“As the UK will no longer be an EU Member State after Exit Day, this SI removes the requirement on payment account providers to facilitate cross-border opening of accounts. Following the changes made by this SI, it will be at the discretion of UK payment account providers whether to continue to offer basic bank accounts to customers legally resident in the EU. This is because it would not be appropriate to oblige UK payment account providers to continue to offer basic banks accounts to EU residents once the UK is no longer an EU Member State.”

4. Draft Competition (Amendment etc.) (EU Exit) Regulations 2019

This draft SI has been laid before Parliament. The draft SI can be accessed here.

5. Draft Takeovers (Amendment) (EU Exit) Regulations 2019

This draft SI has been laid before Parliament. The draft SI can be accessed here.

6. CMA: Role after Brexit

CMA has published a guidance note along with the text of a speech by Juliette Enser (given on 2 October 2018), which sets out details of the preparations CMA is making for its new role as the post-Brexit state aid authority for the UK. The guidance note can be accessed here. The speech can be accessed here.

“The question of when the new state aid regime becomes operational remains subject to the outcome of negotiations between the EU and the UK.

[…]

However, at this stage there remains uncertainty as to the outcome of the Withdrawal Agreement negotiations. We, alongside BEIS, and consistent with the overall UK government policy, are therefore working to ensure that the new regime is ready for March 2019 if necessary.

In relation to the substance of the new regime, the government is intending to pass legislation in autumn 2018 under the European Union (Withdrawal) Act 2018 to bring over the EU state aid rules, subject to certain technical modifications to ensure that the regime operates effectively in a domestic context. This includes bringing across the existing block exemptions covering all sectors of the economy and also giving effect to existing European Commission approvals. The expectation is that, from a substantive perspective, the regime will look very much like it does today – aid grantors and beneficiaries can work on the basis that it will be ‘business as usual’ in terms of rules they are used to applying.”

Other publications from the RegZone Brexit news feed

HoL Secondary Legislation Scrutiny Committee (Sub-Committee B): Proposed Negative Statutory Instruments under the European Union (Withdrawal) Act 2018 – Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

The Committee has drawn the SI to the special attention of HoL and the report includes a Q&A from HMT providing further details on aspects of its explanatory memorandum. The report can be accessed here.

HoL Secondary Legislation Scrutiny Committee: Delegated legislation under the European Union (Withdrawal) Act 2018

The Committee has published correspondence from the Department for Exiting the European Union on the expected flow of Brexit SIs. The report can be accessed here.

PMO: Meeting with business leaders

A statement following the meeting held with business leaders on 31 October 2018 follows. The full statement can be accessed here.

FCA: Our response to key comments from the independent panels’ annual reports for 2017/18

Key themes raised by the panels include: Brexit; FCA's decision-making framework; competition; culture and operational resilience. The full report can be accessed here.

ECB: Banking supervision - risk assessment and supervisory priorities for 2019

ECB sets out its risk assessment and supervisory priorities for the coming year, including Brexit. The full report can be accessed here. The summary can be accessed here.

HoC European Scrutiny Committee: 41st Report of Session 2017-19

Section 4 of the report looks at money laundering and the powers of EBA and details the latest ministerial responses to the Committee’s specific concerns. This matter is still under scrutiny by the Committee. The full report can be accessed here.

HoC: The user's guide to the meaningful vote

This HoC briefing paper explains the role of Parliament in the approval or rejection of any withdrawal agreement that may be reached between the UK and the EU27, what the "meaningful vote" is, what it involves, and what Parliament's role will be if a deal is accepted, rejected or never reached. The full paper can be accessed here.

HoC: Exiting the EU Committee: The progress of the UK's negotiations on EU withdrawal

A transcript of the hearing held on 31 October 2018 follows, in which the Committee heard evidence from a number of academics. The full transcript can be accessed here.

CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.



[1] Dual recognition coordination (DRC) is explained in Chapter 1 of our April 2017 Report. DRC is a broad term to cover a variety of techniques such as “mutual recognition”, “home state recognition/supervision”, “deference”, “substituted compliance” and “passporting”.