On 1 October 2020, as part of the UK Financial Conduct Authority’s (FCA) initiative to ensure an orderly transition and limit disruptions to the post Brexit onshoring process, the FCA published a statement outlining how they will use their temporary transitional power (TTP) after the end of the transition period on 31 December 2020, in addition to specifically outlining the several areas to which the TTP will not apply.
“Onshoring” is the process of amending legislation and regulatory requirements so that they work in a UK-only context, including EU legislation that will form part of UK law by virtue of the European Union (Withdrawal) Act 2018. The onshoring process means that there will be some areas where the requirements on Firms have changed. To help firms and other regulated persons adapt to their new requirements, HM Treasury has given the FCA (and certain other UK regulators) the power to make transitional provisions to financial services legislation for a temporary period. This is known as the TTP.
The FCA has made clear that Firms will need to ensure that they are ready for full compliance with the post 31 December 2020 UK onshored regime for those areas specifically excluded from the TTP extension period.
Scope of the TTP
The TTP, with the implementation of the ‘standstill direction’, gives Firms additional time to fully comply with the post Brexit UK onshored regime. Firms will have until midnight 31 March 2022 (TTP Extension) to implement any required changes. An updated draft of the transition directions and the FCA handbook has been published to guide EEA Firms through the compliance transition.
The above-mentioned changes mean that up until 31 March 2022, a Firm will have the option of either complying with the old pre-Brexit obligations, or implement the necessary changes of the onshored UK regulations, but the FCA highlights that a Firm must still comply with one or the other.
Post 31 March 2022, the UK onshored regulations will apply to all firms automatically.
Exceptions to the TTP
The FCA has pointed out that it will not apply the TTP extension to certain requirements (the ‘key obligations’) where allowing Firms to continue complying with the pre Brexit obligations in certain areas could risk achieving the FCA’s key objectives. For the requirements listed below, Firms must be ready to comply with the new obligations by the earlier deadline of 31 December 2020 (TTP Exceptions):
- MIFID II transaction reporting;
- EMIR reporting obligations;
- SFTR reporting obligations;
- certain MAR requirements;
- issuer rules;
- contractual recognition of bail in;
- client assets sourcebook requirements (CASS);
- market-making exemption under the Short Selling Regulation;
- use of credit ratings for regulatory purposes;
- electronic commerce EEA firms;
- mortgage lending after the transition period against land in EEA; and
- payment services – strong customer authentication and secure communication.
Further information on these key regulatory requirements can be found here.
The FCA has given some leeway to these regulatory requirements, appreciating the ‘complexity’ of some of the regulatory changes, and so is agreeing to delay carrying out enforcement action as long as a Firm can show evidence of taking reasonable steps to prepare for the 31 December 2020 deadline.
The Temporary Permissions Regime (TPR)
The TTP temporary directions confirm that the TTP will generally not be applied to obligations where transitional regimes already exist, such as the TPR. Therefore, EEA inbound firms passporting into the UK (EEA Inbound Firms) or investment funds wishing to carry on passporting and marketing into the UK are still required to submit a notification to the FCA using its Connect system by no later than 30 December 2020 in order to obtain temporary permission to continue to carry out activities in the UK. The final round of notifications submissions has just relaunched on 30 September 2020.
A minor exception lies within part 5 of the FCA transition direction, which states that the obligations which apply to Firms more generally and fall under the TTP extension period will also apply to EEA Inbound Firms and investment funds under the TPR. This therefore allows TPR firms to benefit from some of the reliefs that UK authorised firms are using.
Alongside the TPR, the Government has introduced legislation to create the Financial Services Contract Regime (FSCR) which will allow, for a limited period of time, EEA Inbound Firms that do not enter the TPR to continue to service UK contracts entered into prior to the end of the transition period (or prior to when they enter FSCR) in order to conduct an orderly exit from the UK market once the transition period has ended. The FSCR will be relevant to EEA Firms if:
- they need to carry out regulated activities in order to continue to perform their existing contracts, but do not to notify the FCA that they wish to enter the TPR, or
- they are unsuccessful in securing authorisation when leaving the TPR but still have regulated business in the UK to run off.
Notwithstanding the areas mentioned above, the FCA seems to have applied the standstill direction to a wide range of regulatory requirements. This illustrate that the FCA appreciates the magnitude of the changes that Firms are required to make and wishes for this transition to be as smooth as possible.
Firms which fall within the TTP Extension should utilise the additional time to start planning for the UK onshored regime, which will apply automatically after 31 March 2022.
Firms with regulatory obligations that fall within the TTP Exceptions should also be gathering sufficient evidence to show reasonable steps have been taken to fully comply in the mentioned regulatory areas before the December 2020 deadline.