Brexit update for financial services firms week - ending 19 October 2018

25 October 2018 Download PDF

The week in outline:

The week was dominated by the EU summit in Brussels and the apparent stalemate in the Withdrawal Agreement (WA) negotiations. As anticipated in last week’s update, both sides have now acknowledged the idea of incorporating a mechanism in the WA, which would enable the 21-month transitional period (TP) to be extended (see Document 3).

Preparations for a UK exit without the WA (a ‘no-deal’ scenario) continue both in the UK and in other member states. Both France and Germany published material on their preparations. In the UK, there is now a pipeline of 20 statutory instruments (SIs) for financial services from HMT (under section 8 of the European Union (Withdrawal) Act 2018 (EUWA) as well as the extensive amendments which are being prepared by FCA (see our update for the week ending 12 October 2018) and other FS regulators (see our list of SIs ). Sir Ian Cheshire[1] announced that, across all sectors, there were over 460 SIs that would need to be enacted before 29/3/19.

The MiFID SI published in draft the previous week (and considered in our update for the week ending 12 October 2018) has now been laid before parliament under the affirmative resolution procedure (see ‘Other Documents’ below). The House of Lords Legislation Scrutiny Committee (see Document 2 below) looked at the EEA Passport Rights Regulation SI, which introduces the Temporary Permissions Regime (TPR). There are currently over 7,000 EEA firms exercising passport rights in the UK. The PRA and FCA estimate that they will receive notifications under the TPR from, respectively, about 160 and 1,200 of these firms. The Committee accepted HMT’s proposal for a power to extend the TPR beyond the 3-year period but questioned their use of the negative resolution procedure[2].

The Chancellor delivered a speech at the Annual Investment Association Dinner (see Document 1 below). He painted a rosy picture of HMG’s post-Chequers policy for financial services without giving any real indication of the DRC/access which HMG hoped to achieve under (so called) ‘enhanced equivalence’. He acknowledged the importance of ‘delegation’ to the industry and referred to HMT’s technical notice in August which stated:

“Under EU legislation [3] it is possible for fund managers to delegate portfolio management services to a third party in another country, including countries outside the EU. In relation to funds and managers authorised under the relevant EU legislation, there are requirements for cooperation between the supervisory authorities in the relevant EU member state and the non-EU country concerned. The UK authorities are ready to agree cooperation arrangements with their EU counterparts as soon as is possible, which is a technical exercise to bring the UK into line with other third countries. Unless the EU confirms it does not intend to put such arrangements in place, asset management firms can continue to plan on the basis that the delegation model will continue.”

Hammond said he ‘was pleased to hear the Chairman of ESMA [[4]] say he plans on having these agreements in place well before March and the Chairman of the French Market Authority [[5]] say he has “absolute conviction” that they will be agreed before we leave the EU.’

Meanwhile the FCA[6] will be amending retained EU law, on-shored under the EUWA, and will amend the handbook provisions which implement Article 13 UCITS and Article 20 AIFMD (see footnote 3) on delegation and MOUs with third countries (which under the on-shored provisions will be defined to include both EU and non-EU countries). This will provide a mirror of EU law and enable the UK to enter into reciprocal arrangements with the EU/member states.

As noted in previous updates, HMG hopes that the EU will broaden the scope of equivalence based DRC/access; the EU is reviewing its third country policy in the light of Brexit but in some cases, is looking to tighten up EU rules and restrict DRC. There have been concerns that it might decide to restrict the third country delegation that is currently permitted under AIFMD and UCITS.

Last week’s update included details of two section 8 SIs relating to Alternative Investment Fund Managers and Collective Investment Schemes. These draft SIs (part of the ‘no deal’ preparations) make the necessary section 8 changes following the on-shoring of retained EU law under the EUWA – including changes to converted EU direct legislation and to the ‘preserved’ UK legislation which implements the AIFMD and UCITS directives.

The SIs also include the transitional regime (the temporary permissions regime – ‘TPR’) for EEA AIFs (alternative investment funds) and AIFMs[7] (alternative investment fund managers) and for EEA UCITS[8]. The TRP will last for 3 years but with a power to extend for 12 months. An AIFM, or the operator of an EEA UCITS[9], which markets into the UK before Brexit will have to notify the FCA prior to exit day with details of the relevant fund(s) (AIF or UCITS). These EEA funds (and sub-funds) will then have a temporary permission to be marketed in the UK after exit day.

For funds outside the TPR, the options are either to obtain recognised status under section 272 FSMA or to notify the FCA under the UK’s National Private Placement Regime (NPPR) for marketing to institutional investors.

EEA AIFMs marketing third country AIFs in the UK (via the NPPR and Article 57 of the AIFMD regulation/Article 36 of AIFMD) will be able to continue to do so under the TPR. Thereafter they will need to notify under the third country regime under Article 59/42.

UCITS – the Collective Undertaking Scheme SI. UK firms will continue to be able to take advantage of the PRIIPs[10] exemption for EEA UCITS and to treat them as automatically non-complex instruments to assist sales to retail clients without an appropriateness test (see MIFID SI and PRIIPs related SI, which is still to be published). 

Existing rules on cash and investments will be maintained, so that UK UCITS will still be able to hold cash at EEA credit institutions, and the distinction between investment in EEA and in third country/non-EEA assets will be maintained. 

‘After exit day, the depositary, trustee, operator and/or manager of UK authorised funds will have to meet the following requirements, depending on the legal form the fund takes:

  • authorised unit trust: The manager and trustee must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK

  • authorised contractual scheme: The operator and depositary must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK

  • open-ended investment companies: The depositary must be a body corporate incorporated in the UK, and have a place of business in the UK. The sole director must also be a body corporate incorporated in the UK’

There is currently no passport to act as a depository and EEA firms have to establish a UK branch to do so. These firms will be treated as third country firms but they will be able to obtain temporary permission for their regulated activities and whilst operating under the TPR, the SI will disapply the incorporation requirements of the depositary, trustee, operator and/or manager.

HMT notes that mergers between UK UCITS and EEA UCITS will no longer be possible after exit.

[1] The Government lead Non-Executive Director

[2] Under the former, the SIs proposed by HMT take effect unless blocked by a negative resolution within 40 sitting days of either the House of Lords or the House of Commons, whilst under the latter procedure they only take effect if adopted by positive resolutions of both the House of Commons and the House of Lords. The latter therefore takes more time and normally leads to closer scrutiny and greater risk for HMG.

[3] See art.13 UCITS and art. 20 AIFMD. Art. 13 UCITS states: “where the mandate concerns the investment management and is given to a third-country undertaking, cooperation between the supervisory authorities concerned must be ensured;”

[4] See our report in last week’s update on the ESMA statement - “In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators. These MOUs are essential to meet our regulatory objectives and allow information exchange for effective supervision and enforcement, for example for market abuse cases. ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs. Taking the wider negotiations between the EU and UK into account, we plan to start negotiations with the UK FCA with the objective to have these MOUs in place sufficiently on time before the end of March 2019.”

[5] Reuters reported - “Robert Ophele, chairman of France’s markets watchdog AMF, said delegation could only be possible if memoranda of understanding (MOUs) have been signed between UK and EU regulators to cooperate in supervision.” “This type of MOU is very easy to write. We have them with many many countries and they all look the same,” Ophele told a conference in London organized by financial sector body AFME.”

[6] See FCA consultation CP 18/28 published last week, as reported in our update for the week ending 12 October.

[7] Including EuVECAs, EuSEFs, ELTIFs and MMFs which use an AIF structure.

[8]including Money Market Funds which use a UCITS structure.

[9] The TPR will only cover sub-funds included in the notification; there will be no ‘recognised scheme’ status under the TPR for sub-funds created after Brexit.

[10] Packaged Retail and Insurance based Investment Products

HMT: Speech by Philip Hammond

Text of a speech given by Philip Hammond at the Annual Investment Association Dinner on 16 October 2018 follows. Topics include: the investment management sector; Brexit and the Government's investment management strategy. He notes that "at my Budget in a couple of weeks I will say more about how we can ensure DC pension funds are able to make long-term investment decisions, for the benefit of both their members, and the wider UK economy". The full speech can be accessed here.

“And what we have proposed is logical:

A framework that allows the benefits of UK-EU financial services trade to continue – and maintains open markets, and deep regulatory cooperation.

Under our plan we would build upon the EU’s existing ‘equivalence’ regimes but expand their scope to recognise business activities that are in the interest of both the EU and the UK but not currently covered by the existing regime.

This framework would be grounded in a legally-binding bilateral agreement governing process, with institutional arrangements for regulation and supervision to provide long-term certainty for firms and investors.

Of course - we recognise that this will be a new kind of relationship – reflecting a new balance of rights and responsibilities with decisions relating to access and to our respective markets being decided individually by both sides but within a clear bilateral framework of process that ensures the arrangement is commercially viable – for example through appropriate notice periods for any changes.

There is no reason at all why this new kind of relationship cannot support deep levels of trade and interconnectivity even though we will be outside of the EU, the Single Market and Customs Union.”


“I know for people in this room tonight there is a specific and important question over the regulatory cooperation agreements that underpin portfolio delegation.

I am clear: these delegation arrangements are critical to the investment management sector.

And the direction of travel globally – in this case, strongly supported by the US – is to liberalise.

Investment Management is incredibly important to the UK’s financial services ecosystem but these services are also just as important for the EU - portfolio delegation allows the UK investment management industry to run 35% of the assets under management in the EU – more than twice as much as any other member state.

So - as we made clear in the Technical Notices we published over the Summer we expect these arrangements to continue this model is the global norm, and there is no reason why it should not continue to be so.

The FCA stands ready to agrees these MoUs I was pleased to hear the Chairman of ESMA say he plans on having these agreements in place well before March and the Chairman of the French Market Authority say he has “absolute conviction” that they will be agreed before we leave the EU.

I share his view.”

House of Lords Legislation Secrutiny Committee (Sub-Committee B): Draft EEA Passport Rgiths (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

This publication appears as one of the Committee's papers regarding proposed negative SIs under the European Union (Withdrawal) Act 2018.  It raises concerns that HMT has proposed that the negative, rather than the affirmative, procedure should apply and has published a response from John Glen on this point, adding that "the House may wish to press for a fuller justification of the choice of negative procedure than has so far been given". An appendix to the report provides further details of the SI in a Q&A format. The full publication can be accessed here.

“HMT has said that the PRA estimates it will receive approximately 160 applications for authorisation from EEA firms, many of them substantial and complex; and that this would be a significant increase by comparison with the PRA’s current experience of dealing with around a dozen applications for authorisation per year, normally from start-ups or relatively small firms. As regards the FCA, HMT has told us that, in the year to 31 March 2018, the FCA processed approximately 1,200 applications for authorisation from firms (excluding consumer credit); that applications from a proportion of the firms that passport into the UK would represent a significant increase; and that, for business planning purposes, the FCA is using an assumption of just under 1000 firms that may use the regime (in addition to the business as usual figure). HMT has said that it is content that the PRA and FCA are making adequate preparations to deal with these applications.”


“The draft Regulations allow for the possibility that the period of the regime could be extended in the light of an assessment of progress by the regulatory bodies. We consider it sensible that the Government should be able to introduce such an extension, and we think that a decision to do so would be a matter of great interest to the House. Given the significance of any regulations to extend the temporary permissions regime, however, we do not see it as self-evident that such an instrument should be subject to the negative, rather than the affirmative, procedure, as HMT has proposed. The Economic Secretary to the Treasury has stressed that HMT would be able to modify the time limits only if it considered it necessary to do so. While accepting that this would be the case, we take the view that the House might well wish to debate such a necessity, and that it may also wish to press for a fuller justification of the choice of negative procedure than has so far been given”

EC: Statement by Donald Tusk

Donald Tusk’s statement after the Council meeting 17/18 October 2018 follows. It can be accessed here.

“As there is a lot of speculation about the length of the transition period once the UK leaves the EU, let me say this. The issue of the length of the transition period was not discussed among the EU27 leaders yesterday. But let me recall that in her Florence speech in September 2017, Prime Minister May proposed a transition period of around 2 years. And the EU accepted this proposal unanimously. Therefore, if the UK decided that an extension of the transition period would be helpful to reach a deal, I am sure that the leaders would be ready to consider it positively.”


Other publications from the RegZone Brexit news feed

FCO: Sanctions policy if there's no Brexit deal

This publication sets out what would happen to sanctions if the UK leaves the EU without a deal. The publication can be accessed here.

EC: Statement by Donald Tusk

Text of Donald Tusk's 15 October 2018 letter to Council members ahead of the meeting on 17/18 October 2018 follows. The full statement can be accessed here.

HoC Exiting the EU Committee: Letter from Guy Verhofstadt

The Committee has now published a letter from Guy Verhofstadt concerning Brexit and continuity of contracts. The letter can be accessed here.

PMO: Statement by Theresa May

Text of Theresa May's statement to HoC on Brexit on 15 October 2018 follows. The statement can be accessed here.

EC: Relocation of EBA

COREPER has approved, on behalf of the Council, an agreement with the European Parliament on the text of the regulations for the relocation of EBA to Paris. The publication can be accessed here.


BoE has now published the record of the FPC meeting held on 3 October 2018. It can be accessed here.

TSC: BoE Brexit analysis

TSC has published Mark Carney's response to TSC's request with regard to the above. He notes that BoE " will provide an analysis of how the EU Withdrawal Agreement will affect our ability to deliver our statutory remits for monetary and financial stability, including in a ‘no deal no transition’ scenario". The publication can be accessed here.

Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

These Draft Regulations have been laid before Parliament under paragraph 1 of Schedule 7 to the European Union (Withdrawal) Act 2018, under the affirmative procedure by resolution of each House of Parliament. A draft explanatory memorandum has also been published. These can be accessed here.

HoL: Case for a referendum on the outcome of EU withdrawal negotiations

This HoL Library Briefing has been prepared ahead of a debate taking place in HoL on 25 October 2018. The briefing paper 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.

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