17 May 2018

Brexit and regulation – less than one year to go

A year on from the triggering of Article 50, although some progress has been made, financial services firms are still left with questions and uncertainty

A full year on from the triggering of Article 50 and although some progress has been made, financial services firms are still left with questions and uncertainty about what the economic environment will look like after the UK leaves the EU and what this will mean for their business. On 19 March 2018, the draft agreement on the withdrawal of the UK was published, highlighting the progress made in the negotiations between the UK and the EU. Not all areas in the document have been fully agreed and there will be further negotiations before the document is finalised. This is, however, a material step forward and provides a draft framework for the UK’s future across a number of the main areas where there will be direct ramifications as a result of existing the European Union.

Following closely behind the above publication, we saw both the FCA and the PRA release statements in the last week of March as a response to the publication of the draft withdrawal agreement, building on the previous statements published during late December in 2017.

The regulators’ statements confirmed that the ‘implementation period’ of their Brexit strategy is intended to operate from 29 March 2019 to the end of December 2020, and that during this period:

  • EU law remains applicable in the UK, in accordance with the withdrawal agreement;
  • the benefits of passporting between the UK and EEA will remain (although possibly in a different guise);
  • EU derived obligations will continue to apply and therefore supervisory co-operation will continue;
  • all EU regulation due to come into force before December 2020 must still be considered in firms’ planning; and
  • firms and funds that are currently benefiting from the EU passport into the UK will not need to apply for authorisation under the UK’s Temporary Permission Regime, and further details on this point will be set out later in the year.

What you need to do

Firstly, consider whether your firm needs to continue to have access to the passporting regime. If you’re currently passporting into the UK:

  • in an FCA statement on the EU withdrawal in December 2017, it stated that the UK Government was willing to legislate a Temporary Permissions Regime, if necessary, and the commitment to this course of action was confirmed in the subsequent March 2018 FCA statement.
  • the aim of the proposed regime is to enable firms and funds to still undertake new business in line with the scope of their current regulatory permissions in order to mitigate the risks that a sudden loss of passporting could have on firms, customers and UK financial services as a whole. 
  • the FCA stated that firms will not need to apply for authorisation under this proposed regime, but will need to notify the FCA that they wish to benefit from the regime.  The FCA encourages firms and funds that use and wish to continue to use the inbound passport to complete this survey to enable the regulator to collate information from firms and funds that would like to participate in the regime. The FCA has stated that further details of the Temporary Permission Regime will follow in due course.

If you’re currently passporting into Europe:

  • the FCA advises that UK firms and funds that are looking to passport into the EEA should discuss with the regulator in the relevant jurisdiction the implications of a transitional period for their contingency plans.
  • the FCA, HM Treasury and the PRA state that they welcome the process made in respect of Brexit discussions to date and that this collaborative effort will continue to ensure that there will not be an interruption to the functioning of UK law and regulation post-Brexit.

So, there is nothing surprising in the recent statements – the regulators continue to provide messages of reassurance and stability and have now confirmed a high level view of the regulatory landscape in the intervening period immediately following the UK’s exit from the EU. However, the PRA acknowledges that firms will have difficulty, ahead of March 2019, in mitigating all of the risks to the provision of financial services in the UK and EU. Both the FCA and PRA encourage firms to plan for the different possible scenarios that they could face in respect of Brexit, which could of course be significantly different depending on whether we see a soft or hard Brexit.