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Brexit: implications for Financial Services

On 31 December 2020, the Brexit Transition Period in place under the EU-UK Withdrawal Agreement came to an end.

The relationship between the EU and the UK is now governed by a Trade and Cooperation Agreement (TCA) and the UK has become a third country to the EU similar to China, Japan, Singapore, US and Switzerland.

There are two types of financial services firms that are affected in different ways:

  • firms and funds based in the UK that conduct business in the EEA; and
  • firms and funds based in the EEA that carry out certain types of business in the UK.
Significant Impact post Brexit

Passporting

Passporting allows firms authorised in an EEA state to conduct business within other EEA states based on their ‘home’ member state authorisation. Passporting is no longer possible between the UK and EEA. This affects firms and funds based in the UK that conduct certain types of business in the EEA, and firms and funds based in the EEA that carry out certain types of business in the UK. If firms intend to do business in the EEA, they should ensure that they follow local laws and local regulatory expectations, e.g. seeking authorisation with a local authority where appropriate.

In order to limit the impact of the end of passporting, the UK’s temporary permissions regime (TPR) allows EEA firms to continue accessing the UK market for a limited period of time while they seek full authorisation if required. It also allows EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK. However, the EU authorities have not put forward a similar arrangement for UK firms accessing the EU market and have stated that firms must ensure that they have they necessary authorisations in place.

The Financial Services Contracts Regime (FSCR) has also been created. It functions so that, for a limited period of time, EEA passporting firms that haven’t entered the TPR are able to continue servicing UK contracts entered into before the end of the transition period (or before they enter FSCR). It will allow firms to run off existing contracts so that they can conduct an orderly exit from the UK market.

MiFID Tied-Agent Regime

As passporting rights have ceased, it is no longer possible for UK firms to exercise rights to use tied agents to provide services in other EEA States. Likewise, EEA MiFID investment firms are no longer able to exercise passporting rights to use tied agents to provide services in the UK. Since 1 January 2021 UK-authorised persons are only held responsible for appointed tied agents established in the UK carrying on investment services business outside the UK. EEA States will not recognise the appointment of an agent by a UK firm as sufficient to satisfy any local licensing requirements.

Firms which enter the temporary permissions regime (TPR) will have Part 4A permission. Therefore, if a firm has MiFID II tied agents that are on the Financial Services Register on 1 January 2021, those tied agents continue to be able to act for the firm during its time in the regime. Tied agents which are not shown on the Financial Services Register are not able to carry on regulated activities from 1 January 2021.

Firms using the FSCR to run off their UK regulated business should note that the regime for cross-border services firms (contractual run-off) does not support the use of tied agents in the UK.

UCITS

Since the end of the transition period, UK UCITS are no longer established in the EEA, meaning they have lost their legal status as UCITS under EU law. UK UCITS no longer have an association with the UCITS Directive. New regulations have been published which onshore the UCITS regime. The regulations outline the creation of a "UK UCITS" regime for funds established and authorised in the UK. The TPR allows EU UCITS that were marketed in the UK before Brexit under the marketing passport to continue to be marketed in the UK for a limited period after the end of the transition period.

Under the UCITS Directive, a UCITS can only be managed by an authorised EU UCITS manager so any UCITS managed by UK managers have lost their UCITS status (and are treated as AIFs) and are no longer marketable to retail investors on the basis of a passport. The re-classification of the UCITS as an AIF has the effect that those funds are only marketable in the EU on the basis of national private placement regimes (NPPRs) or, when available, the EU marketing passport for non-EU AIFMs.

Whether it is possible for a UK UCITS management company to continue managing an EEA UCITS depends on the position under EU law and the law of the country in which the EEA UCITS is domiciled.

Potential Significant Impact post Brexit

AIFMD

The AIFMD Brexit Regulations have been published to ensure that the regulatory framework under the AIFMD continues to operate effectively in the UK post Brexit. EEA funds (including UCITS) will be defined as AIFs and the TPR will enable EEA AIFs and AIFMs to continue to market or manage in the UK for a limited period, provided the AIFM notified the FCA prior to the end of the transition period.

EEA AIFs established after Brexit and marketed in the UK are subject to the UK’s NPPR. Reliance on the NPPR requires the AIFM to notify the FCA. A UK AIFM wishing to market its EEA AIF to investors in the EEA will be required to use local NPPRs.

In terms of a UK AIFM with a UK AIF, its permissions for marketing in the UK remain intact post Brexit. However, the UK AIF must be marketed to EEA investors under Article 42 AIFMD by way of the local NPPR (i.e. as the UK AIFM will be a third country AIFM).

Payment Services

If you are a UK Payment Service Provider (PSP) and you carry out cross-border payments, you will now need to provide the name of the payer and payee, and address of the payer, when making payments between the UK and the EEA. These requirements are set out in the Fund Transfer Regulation (FTR). The FTR is a subset of European legislation that supports efforts to combat money laundering and terrorist financing. The requirements have been ‘onshored’ (and amended) in UK legislation. It means PSPs must include name and address information where one party is outside of the UK.

Now that the transition period has ended, PSPs will be able to use the temporary transitional power (TTP) until March 2022. This will allow them to continue to comply with the requirements of the FTR as they were before 31 December 2020, and process payments initiated by EEA PSPs even if the EEA PSP hasn't provided the full name and address details, subject to any scheme rules that might apply. The TTP is intended to minimise disruption for firms, consumers and other regulated entities, enabling UK firms to phase in regulatory changes made as a result of ‘onshored’ EU legislation.

Lower Impact post Brexit

UK-based firms doing business in the UK

UK-based firms that only do business in the UK may be affected less directly than others or not affected at all. However, it is still important for these firms to be aware of the changes made to UK financial services legislation and the FCA Handbook which came into effect after the transition period ended.

UK Financial Services Legislation

The European Union (Withdrawal) Act 2018 has converted existing direct EU legislation into UK law, and preserves existing UK laws that implement EU obligations. The Government’s intention is that the same rules and laws apply post Brexit as before, as far as possible, but with the necessary amendments to reflect the UK’s new position outside the EU, and to smooth the transition to this situation.

FCA Handbook

The FCA has amended its Handbook to ensure it is consistent with changes that the Government is making to retained EU law so that it still works effectively post Brexit.

Conclusion

Now that the transition period has ended, you should ensure that you have:

  • implemented any changes you might need to make to your business;
  • continue to provide information in relation to these changes to customers in a way which is clear, fair and not misleading; and
  • monitor and keep up to date with any further developments.

It may also be useful to discuss the implications with the relevant EEA regulator in the countries where you do business. Please contact our Financial Services Regulatory team for any additional clarifications regarding the new UK financial services regimes that you might need.

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