More than European 1,300 investment funds and firms have expressed interest in joining the Financial Conduct Authority’s temporary permission regime to allow them to continue operating in the UK after the country leaves the European Union.
Nausicaa Delfas, FCA
Nausicaa Delfas, executive director of international at the FCA gave a speech at the City and Financial: 3rd UK Financial Services Brexit Summit in London today. She described the regulator’s preparations for Brexit, even if the UK leaves without a deal.
Delfas said: “We are preparing for a range of scenarios, including the one in which the UK leaves in March of next year without a withdrawal agreement (a so called ‘hard exit’). Of course, we are hopeful for a better outcome – we are strongly supportive of a transition or implementation period, and will do everything we can to support achieving this.”
After Brexit the UK will no longer be part of the passporting regime, which allows a financial firm authorised in any EU member state to sell services in all the other member states. Instead, UK firms will need separate authorisations to operate in the EU and vice versa.
The FCA last month published a consultation on its proposed temporary permissions regime which will allow firms and investment funds to continue to carry on regulated business in the UK for a limited period after Brexit while they seek full authorisation.
“With this regime we seek to minimise cliff-edge risks for inbound firms, and that consumers do not experience any interruptions in service,” Delfas.
To use the temporary permissions regime firms should register between January and March next year, and it will then apply for a maximum of three years.
“Firms will be given with ‘landing slots’ within which they’ll need to submit their authorisation application,’ she explained. “While in the scheme, we propose to operate a system of substituted compliance for certain new rules which impose obligations, so that in most cases firms will not need to start complying with the full UK implementation of a given rule until the point at which they become UK authorised.”
Delfas continued that over 1,300 firms and funds have expressed an interest in joining the regime.
The FCA, in line with the UK government approach, is assuming that UK rules must treat the EU as a third country although the regulator has made some exceptions. For example, the regulator has proposed that UK Ucits funds should keep the same freedom to invest in EU assets to avoid disruption for investors. The regulator has also published statements on how credit rating agencies and trade repositories can convert their EU registrations into registration with the UK.
Delfas continued: “We have also set out our approach to temporary authorisations of Data Reporting Service Providers (entities that provide a data reporting service under MiFID) and clarified how firms can apply for recognition as an overseas investment exchange.”
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However, she continued that although the UK has taken action on temporary authorisations, there has not been any reciprocal action from the EU.
“We have worked to address as many cliff-edge risks that we can, but there are some areas that can only be solved by action from the EU,” added Delfas. “The time to resolve these issues and provide certainty to markets is now, and I hope our EU counterparts will work with us to prepare to manage these risks.”
Regulators also need to conclude memorandums of understanding to support cross border supervision of firms and data sharing as soon as possible.
“We are ready to agree such cooperation agreements,” Delfas added. “This will support our ability to jointly oversee markets, and as such is important not just for the UK, but for our counterparts in the EU too. In our view, work to prepare MoUs should begin immediately.”
She continued that she welcomed the recent commitments from Steven Maijoor, chairman of the European Securities and Markets Authority to start work on MoUs, and the comments that Elisabeth Roegele from BaFin, the German regulator, and Robert Ophèle from the France’s AMF have made in this regard.
Enhanced equivalence
“Of course, there is a broader solution to removing cliff-edge risks which is for both the UK and EU to commit to taking reciprocal equivalence decisions on each other’s regimes, as early as possible,” she added. “Our work to onshore the EU rulebook, in the consultation I referenced earlier, demonstrates that on day one, the UK will have the most equivalent framework to the EU of any country in the world.”
Delfas stressed that equivalence needs to be outcomes-based, so rules do not need to be identical and can be tailored to local markets while continuing to achieve the same outcomes.
“Outcomes-based equivalence should allow for regulators to defer to each other’s regimes,” she said. “In this regard, we welcome the US Commodity Futures Trading Commission’s (CFTC) proposals for closer cross border cooperation and a greater use of deference – reliance on comparable overseas rules – where they deliver broadly equivalent outcomes.”
Barnabas Reynolds, Shearman & Sterling
Barnabas Reynolds, partner, head of financial institutions advisory & financial regulatory group at law firm Shearman & Sterling, spoke on a panel at the conference. He pointed out that the equivalence regime does not cover many financial activities including lending, payments, deposit taking, derivatives, market making and capital markets.
Reynolds said it is possible that the regulators could make an enhanced equivalent process work and he was encouraged by the white paper on financial services from the UK government and the FCA consultation.
“An independent arbitrator of equivalence is needed,” Reynolds added. “Regulators are becoming politicised which destroys the credibility of the whole system. A predictable technocratic process would be a win-win for everybody.”
Jonathan Herbst, partner and global head of financial services at law firm Norton Rose Fulbright, moderated a panel at the conference. He said the EU currently makes unilateral decisions on equivalence.
Herbst added: “A bespoke Brexit deal could include enhanced equivalence which is fundamentally different. We need a definition of equivalence and how the process would work.”
