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Ten further things for asset managers to note about the end of the transitional period

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Investment funds and asset management
  • Financial services - Asset managers and funds



On 13 August we published a client briefing “Ten things for asset managers to note about the end of the transitional period”.  As the end of the Brexit transitional period fast approaches, there have been further developments so we bring you this briefing with ten further things to note about the end of the transitional period and what happens thereafter.

Ten things for asset managers to note

We have set out ten points for asset managers to bear in mind or action before the end of the transitional or implementation period (“TIP”).

For a discussion of how the transitional or implementation period operates in respect of the law applicable to the UK, the onshoring of EU law into UK law on 31 December 2020, Implementation Period Completion Day (“IPCD”) and the prospects for the UK and EU finding each other’s financial services regulations as equivalent (as well as the limitations of equivalence decisions), see our client briefing “Equivalence and the financial services content of the draft UK-EU free trade agreements”.

1. EU temporarily recognises UK CCPs as equivalent for 18 months after IPCD

On 21 September the Commission published Implementing Decision (EU) 2020/1308 determining, for a limited period of time, that the regulatory framework applicable to central counterparties in the United Kingdom of Great Britain and Northern Ireland is equivalent accordance with Regulation (EU) No 648/2012, under which the three UK central counterparties (“CCPs”), LCH Limited, ICE Clear Europe Limited and LME Clear Limited are to be temporarily recognised as equivalent from 1 January 2021 until 30 June 2022.

It had been expected that the temporary recognition would last 12 months, the same length of time as the equivalent UK temporary recognition for EU 27 CCPs.

As the Implementing Decision was published, Valdis Dombrovskis announced that European Union’s banks have until mid-2022 to reduce their “excessive exposures” to London’s derivatives clearing houses, which clear a majority of Euro denominated derivatives. 

“Clearing houses, or CCPs, play a systemic role in our financial system.  We are adopting this decision to protect our financial stability, which is one of our key priorities.  This time-limited decision has a very practical rationale, because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability.”

The Commission has been trying to encourage EU27 CCPs to develop the capacity to clear Euro denominated derivatives since before the Referendum, redoubling its efforts after the UK voted to leave the EU.  That it has had to grant an 18 months’ temporary recognition for UK CCPs is indicative of how EU27 CCPs with the necessary liquidity and capacity to handle the volume of trade in Euro denominated derivatives cannot simply be willed into being by the Commission and how little progress has been made in the last four years.  It is foreseeable that the Commission may have to quietly extend this temporary recognition in the spring of 2022.

2. Delegation of fund management functions from the UK to the EU27 and to the UK from the EU27

The situation in respect of UK firms delegating fund management functions to EEA firms is not currently expected to change.  The necessary memoranda of understanding (“MoUs”) are in place between the FCA, ESMA and the EU27 national competent authorities in order to permit the regulatory and supervisory co-operation necessary for delegation of fund management functions in accordance with Art 20 AIFM directive and Art 13 UCITS directive as onshored into UK law on IPCD.  Currently, there are no UK plans to restrict the ability of UK firms to delegate fund management functions where that is in the best interests of customers.

The legal framework for the continued delegation of certain functions by EU27 UCITS mancos and AIFMs to providers established in the UK was confirmed by the European Commission in its 7 July 2020 Notice to Stakeholders regarding asset management

On 17 July 2020 the FCA announced that all parties had agreed to confirm that the MoUs required for the delegation of portfolio and risk management within this framework “remain relevant and appropriate to ensure continued good cooperation and exchange of information” and that they “will come into effect at the end of the transition period”. 

See our client briefing “UK-EU Memoranda of Understanding to come into force on 1 January 2021”.

As to the future, however, please see the following point.

3. Delegation of fund management functions from EU27 to UK and rules around substance for branches may be subject to more detailed regulation

In ESMA’s response to the European Commission’s review of AIFMD, Steven Maijoor, ESMA Chair, made a wide ranging submission on a variety of issues, including the scope and nature of delegation and substance requirements in the context of the UK leaving the regulatory ambit of the EU at the end of the TIP.  At point 4 of the response (pp5-8), Maijoor writes:

“ESMA sees merit in providing additional legislative clarifications in the AIFMD and UCITS frameworks with respect to delegation and substance requirements.  Such clarifications could be provided in line with the delegation and substance-related guidance provided in the ESMA opinion to support supervisory convergence in the area of investment management in the context of the United Kingdom withdrawing from the European Union.

“In many cases, AIFMs and UCITS management companies delegate to a large extent the collective portfolio management functions listed in Annex I of the AIFMD and Annex II of the UCITS Directive to third parties and only perform some control functions internally (notably risk management functions).  In particular, portfolio management functions are often largely or even entirely delegated to third parties within or outside of the group of the AIFM or UCITS management company.  Moreover, in light of the withdrawal of the UK from the EU, delegation of portfolio management functions to non-EU entities is likely going to further increase.”

“Further legal clarifications on the maximum extent of delegation would be helpful to ensure supervisory convergence and ensure authorised AIFMs and UCITS management companies maintain sufficient substance in the EU.”

Phil Spyropoulos, in our Asset Management and Funds team comments,

“The letter is opportunistically written in the context of the review of AIFMD, but a number of the proposals have broader consequences, including for UCITS.

“UK firms may have cause for concern.  ESMA is now suggesting that the rules around the responsibilities retained by AIFMs and UCITS management companies (the so-called 'letterbox entity' rules) are reviewed – including regarding the use of secondees.  This contrasts with the previous tone which emphasised existing requirements around oversight and internal controls. 

“It is common for UK firms to set up funds in EU27 domiciles with the intention of retaining investment management in London.  ESMA's proposals will no doubt raise eyebrows.”

4. CP20/20: The FCA consults on its approach to authorising international firms

On 23 September 2020 the FCA published Consultation Paper 20/20: Our Approach to International Firms (“CP20/20”).  The CP comes in the wake of an anticipated increase in the number of international firms seeking authorisation at the end of the Brexit transition period.

CP20/20 is relevant to EEA firms that intend to seek authorisation in the UK in the future, both those entering the Temporary Permissions Regime (“TPR”), as well as firms from non-EEA countries which have applied or intend to apply for authorisation in the UK, or which are already authorised in the UK.

The paper has two focus points: how the FCA assesses international firms’ compliance with the minimum standards; and, in circumstances in which international firms are considered to present higher risks of harm, how those risks can be mitigated.

For further details, see our client briefing “CP20/20: The FCA’s approach to authorising international firms”.

5. EU27 firms newly subject to UK regulation will have a 15 month grace period to achieve compliance with non-critical regulations – FCA gives further guidance

Under the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, HMT has the power to permit the FCA, Bank of England and the PRA to make transitional provisions, known as the temporary transitional power (“TTP”), to make modifications in respect of firms newly subject to UK regulation.

In “PS19/5 Brexit Policy Statement: Feedback on CP18/28, CP18/29, CP18/34, CP18/36 and CP19/2” the FCA announced that they will use their TTP powers to waive or modify changes to regulatory requirements which have been amended under the EU (Withdrawal) Act.

On 1 October 2020, the FCA published updated versions of the draft directions that it intends to make using the TPP on its webpage “Onshoring and the Temporary Transitional Power”.  The FCA intends to apply the TTP on a broad basis from the end of the transition period until 31 March 2022.  Where the TTP applies firms and other regulated persons can continue to comply with their existing requirements as they prepare for full compliance with the entire body of EU law onshored into the UK by 31 March 2022.

The onshoring of EU law takes place in accordance with the EU (Withdrawal) Act 2018 (“EUWA 2018”) and statutory instruments made under that Act that modify EU legislation so that it works in a UK context, for instance by changing references to the Commission and the ESAs to references to HMG, the PRA and the FCA.  Those amending statutory instruments are not intended to make policy changes to the onshored regulation, save to the extent necessary for giving effect to the policy that the UK will be an independent sovereign state with regulatory autonomy.  For a discussion of the beginnings of UK divergence from EU financial services law, see our client briefing “Ten things for asset managers to note about the end of the transitional period”.

Under the main FCA transitional directions, firms and other regulated persons must either comply with their existing regulatory obligations, or with onshored regulatory obligations during the TTP period.  While the TTP covers a wide range of rules, the FCA has identified key regulations which it requires EEA firms to comply with in full immediately from 31 December 2020, not all of which are applicable to asset management firms.  These are:

  • MIFID II transaction reporting requirements
  • EMIR reporting obligations
  • SFTR reporting obligations
  • Certain requirements under MAR
  • Issuer rules
  • Contractual recognition of bail-in
  • Client Assets Specialist Sourcebook rules (CASS)
  • Market-making exemption under the Short Selling Regulation
  • Use of credit ratings for regulatory purposes
  • Securitisation
  • Electronic commerce EEA firms
  • Mortgage lending after the transition period against land in the EEA
  • Payment Services – strong customer authentication and secure communication

The FCA is aware that for some firms the scale of the regulatory changes will be significant and it intends to act proportionately when considering firm’s compliance with key regulations, and will not take enforcement action against firms and other regulated persons for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by 31 December 2020 and are attempting to comply with their new obligations as soon as reasonably practicable afterwards.  However, 31 March 2022 is a hard deadline by which the FCA expects all firms other than those in the TPR to comply with all relevant UK laws. 

That expectation applies to firms which have passed through the TPR and obtained UK authorisation prior to 31 March 2022 and all other non-TPR firms operating in the UK.  Firms exiting the TPR on obtaining UK authorisation after 31 March 2022 will be expected to comply with all UK rules from authorisation.

See the FCA webpages “Key requirements of firms” and “Transitional provisions and regimes” for more details.

The Bank of England and the PRA will also be giving broad transitional relief under the TPP, see the BoE webpage “Temporary transitional power” for more details.

6. Notification window for UK temporary permissions regime reopens

Those firms, funds and market participants which gave notice to the relevant UK financial services regulator prior to 31 January 2020 will have the benefit of the temporary permission regime (“TPR”).  Firms, funds and market participants which did not previously give notice but now want to participate in the TPR can do so by giving notice from 30 September until 31 December 2020.  Firms which previously gave notice under the TPR and now wish to update their notification, for instance for new funds they have added to their ranges, or wish to withdraw their notification can now do so again.

While the notification window is open until 31 December we believe that the prudent course of action for any firm seeking to notify, update a notification or withdraw a notification is to submit notification by mid-December unless exceptional circumstances require a later submission.

Our FundsNet Team can assist you with your TPR submissions.

See our latest client briefing on the TPR: “FCA temporary permissions regime (TPR) notification window re-opens”.

See also our TPR flowcharts:

7. EU temporary permissions

Other than the temporary permissions regime for CCPs discussed at point 1 above, it remains to be seen whether the EU may provide any further temporary permission regimes for UK financial services firms.  The Commission’s position, all along, has been that UK financial services firms which wish to continue to sell into EU27 markets should seek appropriate authorisation in an EU27 member state or, where available, take advantage of any equivalence decision the EU may put in place.

We do not recommend that firms seek to rely on equivalence regimes.  Even if the EU and UK were to make decisions granting each other equivalence across all available equivalence regimes, the available framework would still be partial and liable to being arbitrarily withdrawn without cause on 30 days’ notice.  The EU has made it clear that it will not be granting the UK equivalence decisions across all the available equivalence regimes, in some cases postponing equivalence decisions until the EU has settled its own rules and in others declining to make an equivalence assessment until such time as the UK sets out in full how it might diverge.

For a further discussion of equivalence, see our client briefing “Equivalence and the financial services content of the draft UK-EU free trade agreements”.

Since we published that client briefing, UK City Minister John Glen MP has told the House of Lords EU Services Sub-Committee that,

“We have adopted a reasonable, proportionate but thorough approach to our equivalence assessments.  The UK and EU start from a position of having similar financial services regulation and a history of close cooperation, so these should be straightforward assessments.  The EU has decided to make, at most, limited equivalence decisions with respect of the UK.  The Government is considering next steps.”

8. EU27 temporary permissions

Although granting temporary permissions is arguably solely the preserve of the European Supervisory Agencies (“ESAs”) and the Commission, prior to legal Brexit, EU27 NCAs and national parliaments legislated for various temporary permissions and run-off regimes for UK participants in their financial services markets.  This was a patchwork which addressed various national concerns in a variety of different ways.  For instance, Luxembourg was concerned to ensure cross border management of assets by UK firms, while Ireland was concerned about cross border retail insurance provided by UK firms.

We are not aware of any such temporary permissions and run-off regimes having been put in place for after IPCD yet, however, we expect a similar patchwork to emerge as 31 December approaches and we continue to monitor for developments.  We will summarise these temporary permissions and run-off regimes in our regularly updated Financial Services Brexit tracker “Helping you through changing times - Our European Brexit tracker for financial services institutions”.

9. Third country equivalence decisions by the UK

In a letter responding to questions from the House of Lords EU Services Sub-Committee, City Minister John Glen has confirmed that the UK will make equivalence decisions on the basis of an outcomes-based approach.

 “You asked about the upcoming Guidance Document on the UK’s equivalence framework and how it will interact with equivalence decisions for third countries.  The UK is committed to an outcomes-based approach to equivalence – that means acknowledging how different approaches to regulation can achieve the same regulatory objectives.  The operation of an outcomes based approach to equivalence will need to be based on common high standards and cooperation with overseas jurisdictions to ensure they achieve their objectives and can be effectively monitored thereafter.  Any decisions the UK will make for third countries – including the EU – will be based upon these principles.”

This may lead to relatively swift equivalence findings in respect of the principal global financial centres which share the UK’s commitment to high standards and have similar regulatory outcomes to the UK.  In theory this should mean that the UK makes findings of equivalence in respect of a wider range of third countries than the EU has done or will do.

10. Should you be communicating with your clients about the implications of Brexit?

FCA guidance

On its webpage “Preparing your firm for Brexit: end of the transition period”, the FCA advises that if a financial services firm, whether FCA regulated or an EEA firm with customers in the UK, concludes that it or its customers may be affected by the end of the TIP, it should:

  • work out and plan for implementation of the changes it has to make to its business
  • think about any information it needs to give to customers who might be affected by its plans and how it can provide it in a way which is clear, fair and not misleading

It is notable that the FCA leaves it to the discretion of firms as to whether or not they should communicate with their clients.

ESMA guidance

Contrast the position of ESMA, which has all along insisted that all firms should provide appropriate information to their clients on any resulting consequences of the end of the TIP and in its press release on 17 July 2020 noted that all firms should already have communicated to their clients about the implications of Brexit.

Keeping clients informed about Brexit

In the FCA’s webinar on its Brexit preparations broadcast back in February 2020 (unfortunately no longer available online), one point the FCA made was at pains to emphasise was that firms should ensure that they communicate to their clients the issues that Brexit pose for firms and for clients’ investments.  If you need help assessing how Brexit may affect your firm and your clients’ investments and communicating that to clients, we are able to help.

Our Brexit tracker

Our Financial Services Brexit tracker “Helping you through changing times - Our European Brexit tracker for financial services institutions” provides a quick overview of the current position in relation to UK funds and UK fund managers seeking to sell services into EU27 countries after Brexit.

How Eversheds Sutherland can help

If you need help assessing how Brexit may affect your firm, we are able to help. Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues. We would be happy to discuss how we can help you with your Brexit planning, the execution of those plans and the communication with your clients about the affect of your plans upon them and the end of the TIP in general.

To find out more on the implications of Brexit on your business, visit our Brexit hub.