The temporary permissions regime for inbound passporting EEA firms and funds – our approach

The temporary permissions regime will enable relevant firms and funds which passport into the UK to continue operating in the UK if the passporting regime falls away abruptly when the UK leaves the EU.

The notification window opened on 7 January 2019 and closes at the end of 28 March 2019. The notification processes for firms and funds are provided below.

Summary

In December 2017, the Government announced that, if necessary, it would introduce a temporary permissions regime for inbound passporting EEA firms and funds.

If there is not an implementation period and the passporting regime falls away when the UK leaves the EU, the temporary permissions regime will provide a backstop to ensure firms and funds can continue their business with minimal disruption.

It will allow inbound firms to continue operating in the UK within the scope of their current permissions for a limited period after exit day, while seeking full UK authorisation. It will also allow funds with a passport to continue temporarily marketing in the UK.

This page explains more about how the regime will operate including an explanation of which firms and funds can use the temporary permissions regime and the process by which firms and funds will need to notify us that they want to enter the regime and obtain a temporary permission.

Last year, we consulted on the rules which we propose will apply to firms and funds in the regime. Our proposals were set out in two consultation papers:

We are now considering the responses we have received to these consultations before finalising our rules.


On this page      
The current situation What will change after Brexit Inbound firms and investment funds who can use the regime The notification process for firms
The notification process for funds Temporary permissions regime funding

The financial services contracts regime

Prepare for the regime and next steps

The current situation

Financial services firms in any European Economic Area (EEA) member state can use the passporting regime to establish a presence or carry out permitted activities in any other member state. Investment funds can be marketed across the EEA under similar passporting provisions.

In March 2018, the UK and the EU reached an agreement on the terms of an implementation (or transitional) period following the UK’s withdrawal from the EU.

The implementation period is intended to operate from 29 March 2019 until the end of December 2020. During this time, EU law would remain applicable in the United Kingdom, in accordance with the overall withdrawal agreement. Firms and funds would continue to benefit from passporting between the UK and the EEA as they do today. Obligations derived from EU law would continue to apply and firms must continue with implementation plans for EU legislation that is still to come into effect before the end of December 2020.

However, we are continuing to prepare for a range of scenarios, including a scenario where the UK leaves the EU without a deal and without entering an implementation period.

In December 2017, the Government said it would bring forward legislation to establish a temporary permissions regime for inbound passported firms and funds, to enable them to continue their activities in the UK for a limited period after withdrawal. If there is not an implementation period and the passporting regime falls away when the UK leaves the EU, the temporary permissions regime will provide a backstop. It will allow inbound firms to continue operating in the UK within the scope of their current permissions for a limited period after exit day, while seeking full UK authorisation. It will also allow funds with a passport to continue marketing in the UK while seeking UK recognition.

The Treasury has now started to put the legislative framework that will establish the temporary permissions regime in place. Two of the required Statutory Instruments (SI) have now passed into law, relating to: FSMA firms operating in the UK under a financial services passport; and EEA payment institutions, EEA electronic money institutions and registered account information service providers. Two further SIs have been published covering UCITS schemes and Alternative Investment Funds.

What will change after Brexit

If there is no implementation period, when the UK withdraws from the EU the UK will become a ‘third-country’ in relation to the EU and EEA firms will no longer be able to passport into the UK. As such, EEA firms may need to seek authorisation in the UK to continue to access the UK market. Similarly, EEA investment funds will also need to seek UK recognition to continue to market in the UK.

Under the temporary permissions regime, EEA firms currently passporting into the UK which notify us will be deemed to have permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA) on a temporary basis. The scope of the permission will reflect the scope of a firm’s passporting permission pre-Brexit.

As above, separate legislation will enable EEA investment funds to continue to be marketed in the UK during the regime.

If required the temporary permissions regime will come into force when the UK leaves the EU on 29 March 2019 at 23:00. We expect the regime will be in place for a maximum of three years within which time firms and investment funds will be required to obtain authorisation or recognition in the UK, if required.

Inbound firms and investment funds which can use the regime

Firms which can use the regime

  • Firms which have passports under Schedule 3 to FSMA in place before exit day, including firms with top-up permission.
  • Treaty firms under Schedule 4 to FSMA which qualify for authorisation before exit day, including firms with top-up permission.
  • Electronic money, payment institutions and registered account information service providers who are exercising their passporting rights under the Electronic Money Directive (EMD) or the Payment Services Directive (PSD2) before exit day.

These rights could be on a freedom of establishment, a freedom to provide services basis or both.

Funds which can use the regime

The following EEA-domiciled investmentfunds will be able to use the regime, if we have received notification of their intention to market in the UK under the relevant passport prior to exit day.

  • UCITS schemes
  • Alternative Investment Funds (including EuVECAs, EuSEFs, ELTIFs and AIFs authorised as MMFs)

The operator of an EEA UCITS which on exit from the EU benefits from the temporary extension to the marketing regime will also be able to market ‘new sub-funds’ (ie those authorised by the relevant home state regulator after exit day) in the United Kingdom, subject to certain conditions.

Credit institutions and insurers

The Bank of England is the lead authority for authorising incoming EEA credit institutions and insurers. Any EEA credit institutions and insurers operating in the UK that have not contacted the Prudential Regulation Authority (PRA) at the Bank of England should do so now.

The information we provide here is still relevant to these firms, specifically the section on how we will be applying our Handbook to firms in the temporary permissions regime.

Payment and electronic money institutions

The legislation which creates the temporary permissions regime for EEA payment institutions, electronic money institutions and registered account information service providers has now passed into law.

Gibraltar-based firms

Gibraltar-based firms that passport into the UK will not need to use the temporary permissions regime and will be able to continue to operate as they do now post-Brexit until 2020. The UK government will work closely with the Government of Gibraltar to design a replacement framework for after 2020.

Arrangements for other types of firms

We have set out our proposals for other EEA entities that do not use the EU passporting regime to access the UK market. These include:

We have also published our approach to EEA market operators seeking to apply to become recognised overseas investment exchanges.

The notification process for firms

Firms will need to notify us that they wish to use the regime using our Connect system. Notifications will need to be submitted between 7 January 2019 and the end of 28 March 2019.

Firms should also have regard to the following directions:

We have also published a guide to Connect for firms (PDF) covering the notification process.

There will be no fee for firms notifying us that they wish to use the regime and firms should not wait for confirmation of whether there will be an implementation period before they submit their notification.

Firms that have not submitted a notification will not be able to use the temporary permissions regime.

Details of firms with temporary permission will be shown on the FS Register.

Landing slots

We will allocate firms that will be solo-regulated by the FCA a period (a ‘landing slot’) within which they will need to submit their application for UK authorisation. After exit day, we will confirm firms’ landing slots so they can start to prepare their applications. We expect the first landing slot will be October to December 2019 and the last to be January to March 2021.

Firms with top-up permissions will need to submit a Variation of Permissions (VoP) application rather than an authorisation application.

If firms change their plans they will be able to apply to cancel their temporary permission once they have ceased all UK business.

Rules which will apply to firms in the regime

As firms in the regime will have Part 4A permission, the home-host state restrictions on regulatory action will no longer apply and they will come within the full scope of our supervision and rule-making powers. In implementing the regime, we will seek to take a proportionate approach that will enable firms to comply with our requirements from Day 1 while maintaining an adequate level of consumer protection.

Last year, we formally consulted in the rules which we propose will apply to firms and funds in the regime. Our proposals were set out in two Consultation Papers:

A summary of our proposals, which seek to preserve the status quo as much as possible, is set out below:

  • General provision – we propose to apply most of the Handbook via new provisions in GEN 2.2.26R onwards which apply rules that currently apply to passporting firms to temporary permission firms, plus UK home state rules which implement directives (subject to substituted compliance) plus certain other UK rules were protections would otherwise fall away.
  • Financial Services Compensation Scheme (FSCS) – The FCA and the PRA each make rules which set out how FSCS cover works and is funded, covering different areas of the financial services industry. The draft temporary permissions regime legislation provides that the FSCS is only to cover UK branches (with limited cover for cross-border services) during the temporary permission regime in relation to the FCA’s areas of responsibility. Accordingly, our intended approach is to provide customers of firms with UK branches in the regime with FSCS protection, equivalent to the cover provided to customers of UK firms. This addresses the possibility that the UK’s withdrawal from the EU could result in customers of these firms losing compensation scheme protection offered by home states. Firms in the temporary permissions regime would be required to contribute to the cost of the FSCS.
    As a consequence of the draft legislation, customers of firms in the regime without a UK branch will not have access to the FSCS, other than where there is existing FSCS cover in respect of the activities of certain incoming fund managers.
    The PRA will set out proposals for its areas of responsibility in relation to the FSCS separately (ie for deposit-taking and insurance).
  • Financial Ombudsman Service – Our intended approach is that firms in the regime without a UK branch should be included in the Compulsory Jurisdiction (CJ) of the Financial Ombudsman Service. This proposal ensures that customers of these firms will not lose rights to refer complaints to an Alternative Dispute Resolution (ADR) scheme on exit. These firms will be required to pay case fees and annual levies. Firms in the regime with a UK branch are already included in the CJ and this will continue as part of the regime.
  • Senior Managers & Certification Regime – In line with the general approach described above, our intended approach is that, while in the regime, firms with branches should continue to comply with the requirements in relation to Approved Persons that currently apply to them, and then comply with the requirements of the Senior Manager and Certification Regime which are currently stated to apply to EEA branches when these requirements come into force. We do not intend to propose any requirements in this area for services firms, in line with the current position and the general approach.
  • Safeguarding client money and custody assets (client assets) – To ensure client assets held by firms conducting investment business or insurance mediation are protected and to enable us to effectively supervise firms in the regime our proposed approach is that:
    • Firms should report their client assets arrangements to us.
    • Investment firms subject to MiFID II should provide an English translation of their client assets audit reports to us upon either our request, or receipt of an ‘adverse’ audit report on the adequacy of the firm’s arrangements under its client assets obligations.
    • Firms should disclose certain information to UK clients relating to the treatment of their client assets in the event of the firm’s failure. We intend to propose that firms must make this disclosure at the point of entry into the regime in a durable medium, or via a website, providing certain conditions are met.
    • Tied agents of firms in the temporary permissions regime should not hold client assets.
  • Our Principles for Businesses – Our proposed approach is that the Principles for Businesses in our PRIN Sourcebook should generally apply in full to firms in the regime.
  • Status disclosure – Our intended approach is that firms in the temporary permissions regime will be required to include specific status disclosure wording in letters (or electronic equivalents) to indicate that they are in the regime.
  • Single Financial Guidance Body (SFGB) – Our proposed approach is that all firms in the regime should be required to contribute to recovering SFGB costs from the 2019/20 levy fee year (this was already going to be the case for incoming EEA firms with a UK branch).
  • Illegal money lending (IML) levy – The IML levy is raised to recover the expenses that the Treasury incurs providing funding for the teams tackling illegal money lending. The IML levy recovers these costs from consumer credit firms, including firms which currently passport in on a branch basis. Our proposed approach is that the IML levy also applies to consumer credit firms currently operating in the UK on a cross-border services basis.

We are now considering the responses we have received to these consultations before finalising our rules.

Application of legislative requirements to firms

The Treasury has confirmed its intention to provide the financial services regulators with a general power to phase in post-exit requirements, allowing flexibility for firms to transition to a fully domestic UK regulatory framework. This will be available for firms in the temporary permissions regime. However, the proposed approach to how our rules apply builds in necessary flexibility and hence the transitional tool is not expected to apply to the rules described above. We will set out further details of how this might operate in due course.

The notification process for funds

Fund managers will need to notify us of which of their stock of passported funds they wish to continue to market in the UK temporarily using Connect. Notifications will need to be submitted between 7 January 2019 and the end of 28 March 2019.

Fund managers should submit their notification with a full list of the funds they wish to continue marketing in the UK after exit day. If managers think they will add funds to their notification before the window closes, they should wait until they have a full list before submitting it to us.

If a fund is divided into sub-funds, the manager must notify us which of the sub-funds they want to enter the regime. Only these sub-funds will keep their marketing rights.

Read more information on the temporary marketing permission regimes, including our draft directions.

We have also published a guide to Connect for fund managers (PDF) covering the notification process.

There will be no fee for fund managers notifying us of which of their stock of passported funds they wish to continue to market in the UK temporarily and fund managers should not wait for confirmation of whether there will be an implementation period before they submit their notification.

Once the notification window has closed, fund managers that have not submitted a notification for a fund will be unable to use the temporary marketing permission regime for this fund and will not be able to continue marketing the fund in the UK. The only exception to this is for new sub-funds of EEA UCITS that are in the temporary marketing permission regime on exit day (see above).

Details of investment funds with a temporary permission which will continue to be marketed to UK retail investors will be shown on the FS Register.

We will provide further information on how funds will exit the temporary permissions regime in due course.

Rules which will apply to funds in the regime

As with firms in the regime, we are proposing to take a proportionate approach and operators, depositories and trustees of EEA-domiciled funds will need to continue to comply with all of our rules which applied immediately before exit day.

Further details are included in our consultation CP18/29: Temporary permissions regime for inbound firms and funds.

Temporary permissions regime funding

We recover our annual funding requirement (AFR) through periodic fees, paid annually in each fee-year (our fee-year runs from 1 April to 31 March). We consult each year, in April, on the allocation of the AFR across a series of fee-blocks that reflect broad sectors of the industry and are based on the regulated activities firms undertake in the UK. Funds have a separate fee-block within this series.

The AFR we recover from periodic fees is net of the contribution to our costs made by applicants for authorisation/recognition. Applicants pay authorisation/recognition fees when they submit their applications. The level of fees depends on the type of regulated activities the applicant is seeking permission to undertake and for funds depends on the type of fund and number of sub-funds.

Find out more about our fees.

Annual (periodic) fees

We also consult on the basis that firms and funds in the temporary permission regime will pay periodic fees from the 2019/20 fee year. The Consultation Paper includes the indicative fee rates so that firms and funds can estimate the periodic fees they will pay.

The draft 2019/20 fee rates will be consulted in our April 2019 fees rates Consultation Paper. We will provide feedback on responses to that consultation and publish the final fee rates in July 2019, following which invoices will be issued.

Find out more about the periodic fees cycle.

The financial services contracts regime

The Government has published draft legislation for the financial services contracts regime (FSCR). If the UK leaves the EU without a withdrawal agreement, this will enable firms who do not enter the temporary permissions regime to wind down their UK business in an orderly fashion.

The FSCR will automatically apply to EEA passporting firms that do not notify us that they wish to enter the temporary permissions regime, but have pre-existing contracts in the UK which would need a permission to service.

Find out more about the financial services contracts regime.

Preparing to notify

Before notifying, firms and fund managers should take these steps now to prepare to make the process as simple as possible:

Next steps

The notification window is now open and will close at the end of 28 March 2019.

Notifications should be submitted via our Connect system. We have published guides to using Connect covering the notification process for firms (PDF) and fund managers (PDF).

Firms that do not notify us that they wish to use the temporary permissions regime will be subject to the financial service contracts regime.

If you have any questions please contact us.