Brexit: FCA compliance and cross-border trading

We explore what implications Brexit has on all FCA regulated firms, in particular, how to continue accessing the UK markets (with an FAQ).

IMPLICATIONS OF BREXIT.

The UK left the EU on 31 January 2020 with a Withdrawal Agreement. It has entered a transition period which is due to operate until 31 December 2020. During the transition period, EU law will continue to apply in the UK, however come January 2021, the UK will formally leave the EU, impacting all firms, regardless of the size, nature of business or its location.

The FCA has entered into a Memorandum of Understanding (MoU), covering cooperation and exchange of information in the event the UK leaves the EU without a withdrawal agreement, including

  • A multilateral MoU with EU and EEA National Competent Authorities (NCAs); and

  • An MoU with the European Securities and Markets Authority (ESMA)

Key consideration for all UK firms.

Irrespective whether firms operate cross-border, the end of the transition period will have an impact on normal operations. It is an FCA compliance obligation of firms to ensure the risks faced by them are appropriately assessed and managed (see our article on key FCA rules).

 

So what are these key risks that impact national firms?

Human Resources.

It is already clear that, in some sectors, Brexit has prompted concerns over future labour supply. For employers facing uncertainty, this means putting resources and thinking into workforce planning, a process which has previously suffered from the mistaken belief that it holds no value in uncertain times.

UK's exit from the EU raises a number of questions for employers and employees alike, meaning this aspect impacts every FCA authorised firm in the UK.

Under the current rules, firms must ensure that they retain sufficient resources to maintain uninterrupted operation, irrespective of the circumstances. This was clearly emphasised by the FCA during the COVID pandemic, when the FCA prompted firms to ensure even uninterrupted operation during lock-down, even if it meant opening the offices for key workers.

To ensure preparedness for Brexit, and compliance with the FCA rules around threshold conditions and risk management (see key rules here), firms should consider and review:

  • whether any employees within the firm will be impacted by the end of the transition period (eg require visas), and

  • whether any of those employees deemed to be “key individuals”, such as directors, head of departments or key suppliers.

Data Protection.

From 1 January 2021, in the absence of an adequacy decision, transfer of personal data from the EEA to the UK will need to primarily rely on extra commitments by UK data importers.

The ICO has provided further guidance on what form these would need to take, such as 

  • putting in place contracts with EEA-based data exporters, or

  • "Binding Corporate Rules", or codes of conduct.

In either case, the FCA has clearly expressed that firms must review their own arrangements to ensure that the data flow remains compliant with post-transition rules. This in particular, should include:

  • how the end of the transition period will impact the data flow currently in place, and

  • (firms who have no contacts, suppliers or customers in the EEA) review the privacy policies and update them according to reflect the changes in legal instruments.

After the end of the transition period, in the absence of an adequacy decision, exporters of personal data from the EEA to the UK will need to primarily rely on extra commitments by UK data importers to protect the data they receive (and to flow those safeguards through to other recipients of the data).

Sanctions Regime.

The new regulations were made under the Sanctions and Anti-Money Laundering Act 2018, which includes the so-called "Magnitsky clause", allowing the UK to impose sanctions on individuals and organisations suspected of having committed gross human rights breaches.

At the end of the transition period, the EU sanctions regimes will cease to automatically apply. The UK Government has implemented legislations to ensure the uninterrupted operation of an independent sanction regime; incorporating the EU sanctions.

The UK Government also unilaterally introduced a “Global Human Rights” sanctions regime.

Whilst the regime will remain largely unchanged, there are some deviances (particularly surrounding some interpretations), so firm should remain vigilant and review the key changes.

Other considerations.

Onshoring EU regulations (FCA regime)

The FCA has commenced with the onshoring of EU regulations. These changes are now available on FCA’s website (Hanbook).

Firms who do not conduct cross-border trade may not be materially impacted, albeit minor changes to other rules are expected.

Other suppliers

Where firms “import services” from the EEA, such as IT support, secretarial service and so on, firms would need to ensure that such suppliers are able to continue the provision of services without interruption.

This is particular important for areas where such service is of “critical nature”, such as IT support services.

Every industry is affected by Brexit due to the potential economic impacts and manpower issues, (some industries will be impacted more than others such as financial service)...

ONGOING ACCESS TO THE UK MARKET.

One of the FCA’s statutory objective is to ensure the integrity of the financial services sector and protection consumers.

 

Spanning out of such objectives, the FCA have taken a number of steps to limit the impact of the end of the transition period to UK-based customers. This includes introducing the temporary permissions regime (TPR) and the financial services contracts regime (FSCR).

Presentation43.png

Temporary Permission Regime (TPR).

The temporary permissions regime (TPR) will enable relevant firms and funds which passport into the UK to continue operating in the UK when the passporting regime falls away at the end of the transition period.

 

As per current affairs, firms under the TPR will be allocated a specific slot to submit their application for direct authorisation, within 3 years from 1 January 2021.

 

Where firms intend to rely on TPR, they need to notify the FCA.

Financial Services Contracts Regime (FSCR).

Alongside the TPR, the Government has created the FSCR. This will allow, for a limited period of time, EEA passporting 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.

 

Where firms intend to rely on FSCR, they need to notify the FCA.

Frequently Asked Questions (FAQ)

Do firms looking to benefit from the TPR or the FSCR need to inform the FCA?

  • Yes, firms would need to notify the FCA in advance.

 

The product was sold to a UK citizen before the end of the transition period, but the policy holder moved to the EU since (migration). What happens now?

  • EIOPA issued a guidance which recognise this situation. The EIOPA’s recommendation is: in such cases, the matter should be deemed as if the sale has taken place in the UK

  • It is vital to note that this is only a guidance and therefore different approach can exist between the EU member states. Brokers should check with local regulatory authorities.

 

When will the FCA start allocating landing slots for direct authorisation under the TPR?

  • Currently, it is anticipated that the TPR will be in place for 3 years (as a minimum), however this can be extended.

  • The FCA confirmed that further communication will be released early next year, once they had an opportunity to assess the work-load.

 

What are the implications for firms that are passporting into the EU currently?

  • The EU has not established similar systems to the TPR or FSCR. As a result, each firm should be checking with the given members state to ascertain the “local approach”.

 

I’m only operating in the UK. Do I still need to know about the changes?

  • Absolutely! Whilst firms do not need to know the intricate details of the changes, it is certain that all firms are impacted by Brexit to some degree. The very least, firms should document their assessments.

  • Firms should also be aware that the FCA is currently onshoring EU regulation (eg adopting into UK law) which will result in some changes to the FCA handbook.

RECEIVE OUR REGULATORY SUMMARY WITH SELF-ASSESSMENT GUIDE

Subscribe to our free regulatory newsletters and receive our brief about Brexit, including a summary of the recent FCA consultation on "regulating international firms" CP 20/20!

Thanks for joining - please check your spam for the email and free summary!

Verify your compliance today

Contact us with any questions or subscribe to our free newsletter and receive a free self-assessment guide!