The UK left the EU on 31 January 2020 with a Withdrawal Agreement and entered into a transition period. This period ended on the 31 December 2020. On the 24 December the UK and the EU agreed a trade deal "UK-EU Trade and Cooperation Agreement (TCA)" which lays down the details of the future relationship between the UK and the EU. Whilst the TCA has been approved in the UK, EU ratification is still required. We look at the trade deal means for financial services.
The financial services content of the TCA is minimal; there are also 26 pages of Declarations with a section dedicated to financial services and texts on other topics, such as nuclear cooperation.
The key points of the TCA for financial services firms:
1) The UK is no longer party to the passporting arrangements which are in place within the European Economic Area (EEA).
- (i) This means that UK financial firms are no longer able to passport services or branches within the EEA. UK firms must now comply with the different requirements of individual member states to service EEA customers.
- (ii) Similarly, EEA firms who previously passported into the UK are no longer able to do so. However, the PRA/FCA (Prudential Regulation Authority/Financial Conduct Authority) has implemented a Temporary Permissions Regime (TPR) which enables firms to continue operating in the UK whilst their applications for authorisation are determined. Firms wanting to take advantage of the TPR should already have submitted applications for part IV authorisation. Once these firms are authorised, they will need to comply with the PRA/FCA’s requirements which apply to overseas firms and third country firms. In short, the regulatory requirements which will apply to these firms is greater than it was previously (as regulation was principally reserved to the home state regulator) and these firms should start to consider what the extended regulatory regime will mean to them. The sorts of things firms should be considering include senior management arrangements, systems and controls; an extended Senior Manager and Certification staff regime; compensation and complaints. Where a firm is dual regulated, it will also need to consider the requirements in the PRA handbook and whether it is subject to prudential requirements and whether its reporting obligations will increase.
2) The EU and UK have committed in principle to regulatory cooperation between the UK and EU in a non-binding Joint Declaration. The Joint Declaration confirms an intention to establish a Memorandum of Understanding framework by March 2021.
3) The FCA is now the UK regulator of UK-registered and certified credit rating agencies.
- (i) This means that any UK legal entity that wishes to issue credit ratings publicly or by subscription will need to be registered or certified by the FCA.
- (ii) Any firms who use credit rating agencies for regulatory purposes should only use credit agencies issued or endorsed by agencies who are registered or certified by the FCA.
What should firms be doing now?
Whilst passporting is the key issue, there are potentially other circumstances where firms may need to consider the impact of Brexit – for example:
- (a) marketing or providing regulated products or services to customers resident in the EEA;
- (b) existing or new arrangements with agents or intermediaries located within the EEA;
- (c) membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA;
- (d) depositing client money and/or custody assets in any institution in the EEA, or using a safeguarding institution in the EEA;
- (e) outsourcing arrangements with third parties located within the EEA;
- (f) contractual arrangements:-
- data sharing arrangements with third parties located within the EEA;
- contractual arrangements which refer to EU law should be reviewed;
- (g) customer communications – do customers need to be informed of any changes which may impact them – for example:-
- access to UK or overseas compensation schemes and dispute resolution schemes;
- impact on certain types of insurance i.e. travel insurance;
- making payments in or to the EEA; and
- (h) website content – does it need to be updated?
Does all EU Legislation Fall Away?
In short, no. The EU (Withdrawal) Act 2018 converted existing EU legislation into UK law that had direct effect in the UK at the end of the transition period. UK laws that implemented EU legislation were also preserved.
The Government was given powers to amend the retained EU legislation so it works in the UK after Brexit. It has used this power to make numerous statutory instruments that amend retained EU financial services legislation. The Government’s intention was that the same rules and laws continue to apply, as far as possible, but with the necessary amendments to reflect the UK’s position outside the EU.
The FCA/PRA handbooks have been amended where appropriate to reflect any changes.
What does the future look like for financial services firms?
To get the TCA agreed, financial services regulation has to a great extent been left on the side as ‘too difficult’. All we currently have is a declaration of intent to sort out an Memorandum of Understanding framework by 31 March 2021. There are likely to be significant challenges agreeing any proper reciprocal arrangements with the EU on financial services, as such, it is likely that we will be stuck with this ‘temporary’ situation for some time, as well the possibility of increasing risk of ‘divergence’ as time goes on.
Contact us if you need any advice on what the trade deal means for financial services.
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