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Brexit and contractual continuity – how no deal will work becomes clearer

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Financial institutions

18-03-2019

Financial Services Contracts Regulations 2019 - UK-EU27 memoranda of understanding

Introduction

FCA Consultation Paper CP19/2 “Brexit and contractual continuity”

The new financial services contracts regime (the “FSCR”) is available for firms with pre-existing contracts in the UK that would require a permission to service, which:

• do not submit a notification to enter into the temporary permissions regime (“TPR”)

• are unsuccessful in securing, or do not apply for, full UK authorisation through the TPR route (and leave the TPR)

The FSCR will apply automatically to these firms. It will allow them to continue to service UK contracts entered into before Exit Day or before exiting the TPR for a limited period, provided that they meet the conditions of the FSCR.

The FSCR has been established to allow EEA-based firms to run-off existing UK contracts and to conduct an orderly exit from the UK market. Unlike the TPR, the FSCR will not allow firms in the regime to undertake any new business in the UK. The FSCR will provide that a firm is able to carry on a regulated activity only where it is necessary for the performance of a pre-existing contract (which is a contract made before Exit Day, where a firm enters the FSCR on Exit Day), along with certain other specified activities.

To read FCA CP19/2, click here.

Contract continuity in the UK for firms and funds that do not join the TPR

For those firms and funds that do not participate in the TPR, the UK Government has published two draft statutory instruments, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 and the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) (No. 2) Regulations 2019, (the “Regulations”) which provide for the run-off of cross-border UK/EU financial services contracts.

The relevant EU law that the Regulations amend allows EEA firms, central counterparties (“CCPs”) and trade repositories (“TRs”) to provide regulated services in the UK on the basis of being authorised in their home Member State, or recognised (in the case of non-EEA CCPs and TRs) by the EU’s European Securities and Markets Authority (“ESMA”), or (in the case of EEA TRs) registered by ESMA.

The Regulations address three types of provider:

• EEA firms that passport under the Financial Services and Markets Act 2000 (FSMA)

• EEA payments and e-money firms

• Non-UK CCPs and TRs

FSMA

The UK’s participation in the EEA passporting system is implemented under FSMA. This is referenced in other pieces of legislation that concern EEA firms performing regulated activities in the UK using a passport, and UK firms that perform regulated activities in the EEA using an EEA financial services passport.

The relevant parts of FSMA are being repealed because on a no deal Brexit the legal framework under which EEA firms provide FSMA-regulated services in the UK will no longer be operative. The EEA financial services passport depends upon, amongst other things, a legal framework including allocating regulatory responsibilities and duties of cooperation between the authorities of EEA home Member States and the authorities of the UK. As a result, EEA firms which do not enter the TPR could be legally unable to service outstanding contracts with UK counterparties and consumers.

The Regulations amend the TPR to enable relevant EEA firms that do not enter the TPR, or exit it without obtaining UK authorisation, to continue to meet their existing contractual obligations in the UK for a period of up to two years after Exit Day, or five years in the case of insurance contracts. This will allow them to wind down their business in an orderly manner or transfer that business to a UK entity.

Payments and e-money

Payments and E-money firms access the EEA passporting system under the second Payment Services Directive (“PSD2”) and the second Electronic Money Directive (“2EMD”), which were transposed into UK law by the Payment Services Regulations 2017 and Electronic Money Regulations 2011.

On a no deal Brexit, the legal framework under which EEA payments and e-money institutions provide services in the UK will no longer be operative, for the same reasons as for FSMA. As a result, EEA payments and e-money institutions which do not enter the payments and e-money Temporary Permissions Regime could be legally unable to service outstanding UK contracts with UK counterparties and consumers.

The Regulations amend the TPR applicable to payments and e-money firms, enabling those that do not enter the payments and e-money TPR, or exit it without obtaining UK authorisation, to continue meeting their existing contractual obligations in the UK for a period of up to five years after Exit Day. This will allow them to wind down their business in an orderly manner, or transfer business to a UK entity.

Central counterparties (“CCPs”) and trade repositories (“TRs”)

Non-UK CCPs are not granted ‘passporting’ rights under EU law. However, under EMIR they are permitted to provide services to UK firms if:

• they are located in the EEA located and ‘authorised’ by their home regulatory authority

• if they are non-EEA (‘third country’) located and ‘recognised’ by ESMA

EMIR also requires all information on European derivative transactions to be reported to TRs that are registered or recognised by ESMA.

On a no deal Brexit, non-UK CCPs will be unable to provides services to UK firms until they are recognised under a UK regime for third country CCPs. If non-UK CCPs do not enter (or enter and then exit without obtaining recognition) the Temporary Recognition Regime (“TRR”), this may introduce risks to firms and, in certain cases, to the broader financial system.

In addition, TRs registered or recognised by ESMA will no longer be able to be used by UK firms to satisfy the onshored EMIR reporting obligation. If TRs enter and exit the TRR for TRs without obtaining registration, this may also introduce risks to firms.

The regulations will amend the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 to establish a ‘CCP run-off regime’. The run-off regime will allow UK firms time to wind down relevant contracts and business with non-UK CCPs that do not enter the TRR for CCPs, or exit from it without obtaining recognition to provide services in the UK.

The regulations will amend the Trade Repositories (Amendment and Transitional Provision) (EU Exit)

Regulations 2018 to establish a ‘TR run-off regime’, the purpose of which is to mitigate risks faced by UK firms in the event that a TR is removed from the TRR for TRs without obtaining recognition to continue to provide services to UK firms.

To read the first draft SI, click here.

To read the second draft SI, click here.

FCA Consultation Paper CP19/2

The FCA has published a consultation paper on the handbook amendments necessary to implement various Regulations.

In their proposals they have tried to balance the need to:

• secure an appropriate level of consumer protection following an EEA firm’s loss of passporting rights

• design a regime that EEA firms can reasonably comply with from Exit Day, which minimises disruption for consumers

However, for certain firms in the regime, there are limitations in the FSCR Regulations on what rules can be applied.

To read FCA CP19/2, click here.

UK-EU27 memoranda of understanding (“MoUs”)

The FCA and ESMA have confirmed that the necessary MoUs between the UK, the EU27 and ESMA will be in place in the event of a no-deal Brexit on 29 March.

The MoUs are:

• a multilateral MoU with EU and EEA National Competent Authorities (“NCAs”) covering supervisory cooperation, enforcement and information exchange

• an MoU with ESMA covering supervision of credit rating agencies (“CRAs”) and TRs

These MoUs form part of the necessary regulatory framework to support the cross-border delegation of the management of funds and cross-border clearing after Brexit.

Steven Maijoor, ESMA Chair, in a speech to the European Financial Forum:

“As announced recently I am happy that we have agreed MOUs with both the Financial Conduct Authority (FCA) and the Bank of England. The agreement between the FCA and the EU27 NCAs concerns a Multilateral MOU (MMOU). The agreed cooperation agreements will first of all support continued access to market infrastructures in the UK, but also allow the continuation of the delegation model for, for example, the asset management sector.”

To read Steven Maijoor’s speech, click here.

Andrew Bailey, FCA Chief Executive:

“I am pleased we have been able to agree these MoUs. They will allow for continued close cooperation in the event the UK leaves the EU without an agreement. They should also minimise the potential for disruption, which we know is particularly important for the investment management sector, Credit Rating Agencies and Trade Repositories.”

To read the FCA press release, click here.

How Eversheds Sutherland can 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 and execution of those plans.

For more information contact

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