It came as no surprise that the FCA identified in its Business Plan for 2019/2020 that the withdrawal from the EU is the most significant change affecting financial services markets, and is the FCA's immediate priority.
As we are probably all aware, the UK was due to leave the EU on 29 March 2019, two years after it started the exit process. MPs did not agree with the withdrawal agreement and after initially granting a short extension, EU leaders have now backed a six-month extension until 31 October 2019.
In this article, we look at the preparatory work the FCA is undertaking in anticipation of the UK's withdrawal from the UK and consider how the FCA will strengthen its international engagement.
The FCA has been providing both technical and specialist advice to the government throughout the Brexit process to support a smooth transition to the UK's withdrawal. The EU (Withdrawal) Act (the Act) will transfer and convert existing EU laws at the point of exit. This means that UK laws which implement EU obligations will be preserved in our legal system. This is to ensure that the same rules and laws apply to the financial services market as they did before the EU withdrawal. Whilst some would argue that this is not in the spirit of those wanting to leave the EU, the FCA views this as an important step to ensure continuity of the legal and regulatory framework.
Given the FCA’s integral role in the financial regulatory regime in the UK, they have been a key player in ensuring EU legislation that is adopted in the UK has the desired effect. Some of the obvious amendments that have been made are removing references to the Commission or other supervisory authorities, since they will no longer have jurisdiction. To avoid a ‘cliff edge’ risk scenario, where upon an exit from the EU all rights and permission come to an end, the FCA has worked with the government on a temporary permissions regime.
As it currently stands (with no withdrawal agreement reached), financial services firms and investment funds in any European Economic Area (EEA) member state can establish a presence or carry out permitted activities in any other member state under the passporting regime. If the UK leaves the EU without a withdrawal agreement or implementation period, the passporting regime and treaty rights for EEA firms will fall away. The UK will become a ‘third-country’ and EEA firms will no longer be able passport into the UK.
The FCA has worked with the government on implementing a Temporary Permissions Regime to maintain current protections for consumers and firms.
The Temporary Passporting Regime will allow firms who wish to continue carrying out business in the UK in the longer term to operate in the UK for a limited period after exit day whilst they seek authorisation. The regime will be in place for three years to give investment funds and firms sufficient time to obtain authorisation and recognition in the UK. Given the additional extension to the Brexit process, the FCA has set a deadline of 30 May 2019 for eligible firms to notify the FCA that they wish to use the regime.
Major institutions have planned for all types of exit from the EU over the last two years, and this extended application period will offer some regulatory predictability in this period of uncertainty.
The preparatory work that the FCA has carried out in anticipation of Brexit appears to be focused primarily on minimising disruption to the market. But the FCA has also said in its business plan that it wants to focus on developing its relationship with other international regulators. Contrary to the suggestion that Brexit may contribute to a weakened relationship with other countries, the FCA appears to be more globally focused.
In a recent speech delivered by the Executive Director of International at the FCA, Nausicaa Delfas commented that the FCA’s focus on international cooperation and standard setting will increase. A new area of focus for the FCA is its role in providing technical expertise and advice to the Treasury as the government develops financial services trade policies. Post Brexit, the UK will be able to develop an independent trade policy, something which the FCA will support by giving technical advice on free trade agreements.
In October 2018, the FCA and the Securities and Futures Commission (SFC) entered into a memorandum of understanding (MoU) on mutual recognition of funds with Hong Kong. This will allow eligible Hong Kong public funds and UK retail funds to be distributed in each other's market. Through this agreement, the FCA is increasing its engagement with international bodies, one of the aims of the most recent business plan.
The UK's relationship with the EU is still under negotiation. The FCA has already taken a number of steps to ensure as little disruption as possible. It appears that despite the uncertainty, the FCA is viewing Brexit as an option to explore new markets and encourage global regulatory cooperation.
Contributor: Harriet Roach
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions