[The Post-Brexit approach to regulating financial services in the UK as at Q1 2021
Following on from our “Key Implications” briefing note on the UK-EU Trade and Cooperation Agreement (24 December 2020) (the Agreement) this briefing note takes a more detailed look at the development of the UK’s financial services position and the FCA’s stated approach in the period before the proposed Multilateral Memorandum of Understanding is finalised (scheduled for mid-March 2021).
- Key implications for financial services
As will be clear from the comments provided in our Key Implications briefing note, the Agreement contains very little specific information regarding the current (now post-Brexit) and future arrangements with respect to financial services (including the investment management sector).
What does this mean?
In effect there has been a “hard Brexit” for financial services for the present. The parties have committed to reaching agreement via a Memorandum of Understanding (MoU), which provides the foundation for equivalency decisions, by March 2021 (subject to any agreed extension). In the meantime, investment managers need to understand the regulatory treatment in each EU member state until those discussions are complete and the MoU agreed.
What has happened to passporting?
EU “passporting” rights, whether under the Alternative Investment Fund Managers Directive (AIFMD) or the directives on Undertakings for the Collective Investment in Transferable Securities (UCITS), in relation to the marketing of funds or provision of fund management services or under the Markets in Financial Instruments Directive (MiFID) with respect to the provision of cross-border investment services and activities (including marketing), are no longer available for UK firms.
Permission to provide cross-border investment services and delegation arrangements by, or to, UK firms must be confirmed on a case-by-case basis for each EU jurisdiction.
At present “equivalence” decisions under the EU regulatory framework are limited. As a result, compliance with overlapping regulatory requirements may be required. For example, entering into derivative transactions with EU counterparties requires compliance both with the UK and EU regulatory requirements. In that instance, UK firms are required to comply with the share trading obligation with respect to shares admitted to trading on UK regulated markets, while EU counterparties are restricted from trading on UK exchanges with respect to shares admitted to trading on EU regulated markets. This is a level of complexity that most firms will not have ever seen before in the European context, care must be taken to ensure that no elements are overlooked.
 Trade and Cooperation Agreement (including Annexes and Protocols) between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part. Other related agreements and declarations made by the parties are: the Declarations; the Nuclear Cooperation Agreement; the Agreement on Security Procedures for Exchanging and Protecting Classified Information; and an Exchange of letters between the United Kingdom and the European Atomic Energy Community on provisional application of the Agreement for Cooperation on the Safe and Peaceful Uses of Nuclear Energy.
2. FCA Guidance and Expectations on Brexit
The FCA published final guidance in late December 2020. The final Brexit instruments and Temporary Transitional Power (TTP) directions were published on 22 December 2020; Onshoring and the Temporary Transitional Power together with the Statement on use of the Temporary Transitional Power to modify the UK’s derivatives trading obligations were published on 31 December 2020. The FCA also published a statement on its expectations of UK firms with respect to their Brexit preparedness, systems and operational changes, and clients.
- FCA TTP directions
The FCA expects UK firms to follow the TTP directions where applicable. The FCA has “applied the TTP on a broad basis from the end of the transition period until 31 March 2022.” This means that “firms and other regulated persons do not generally need to prepare now to meet the changes to their UK regulatory obligations brought about by onshoring” but are instead expected to “use the duration of the TTP period to prepare for full compliance with the on-shored UK regime by 31 March 2022.” The FCA has issued the following TTP directions:
(i) Main/Standstill Directions: Firms must either comply with regulatory obligations that applied before the end of the transition period (i.e., 11:00 p.m. on 31 December 2020) or with the on-shored regulatory obligations during the TTP period.
(ii) Prudential Direction: Firms must continue to comply with their pre-Brexit obligations covered by the Prudential Direction (i.e., as they stood before the end of the transition period) until 31 March 2022.
(iii) Share Trading Obligation (STO) Direction: Article 23(1) of the Markets in Financial Instruments Regulation (MiFIR) was on-shored by the UK’s Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 (as amended) (“UK MiFIR”). This requires a firm to trade in-scope shares on UK trading venues, systemic internalisers and equivalent third-country venues. However, the STO Direction effectively allows a firm to continue trading shares on EU trading venues and systemic internalisers without those activities constituting a breach of UK MiFIR. (The FCA has not yet set a date of when this Direction will expire.)
(iv) Derivatives Trading Obligation (DTO) Direction: Article 28 of the UK MiFIR requires financial counterparties and non-financial counterparties to trade in-scope derivatives on UK trading venues and equivalent third-country venues when concluding relevant transactions.
The TTP directions do not apply to all obligations that will change as a result of Brexit. Where the TTP does not apply, “firms will need to comply with the changed requirements from the end of the transition period” (i.e., immediately). In particular, the TTP does not apply to a number of requirements under the on-shored UK regimes, which will continue to apply unamended, notably:
MiFID II transaction reporting requirements;
EMIR reporting obligations;
SFTR reporting obligations;
MAR Suspicious Transaction and Order Reports (STORs);
STS notifications under the UK Securitisation Regulation;
Those areas where HM Treasury has taken an equivalence decision in relation to European Economic Area (EEA) jurisdictions, in the area affected by such decision; and
Most (if not all) instances relating to changes to a firm’s regulatory perimeter or financial promotions (i.e., those activities for which a firm needs authorisation, registration or approval from the FCA to carry out).
UK firms must comply with English law, including with EU law as amended and retained in English law during the on-shoring process. This includes compliance with the various Brexit Statutory Instruments that are now law and part of the UK’s regulatory regime.
Cessation of the EU passport
Following the end of the “EU passport”, the FCA stated that it expects “UK firms to take the steps available to them to ensure they act consistently with…local laws and expectations. The FCA is clear that firms’ decisions need to be guided by obtaining appropriate outcomes for their customers, wherever they are based.”
Client disclosure requirements
The FCA frequently stated in the lead up to Brexit that it expected firms to have “put in place plans to ensure any possible disruption to UK financial services is minimised at the end of the transition period.” The FCA further indicated that those plans should include contact with the firm’s clients to inform them of any possible disruptions or changes due to Brexit but only where disruption is unavoidable.
Systems and operational changes
The FCA (in speeches made by several senior staff members during the last quarter of 2020) stated that, post-Brexit, its focus will be on the “strategic objective of ensuring markets function well.” It is understood that this means that the FCA will “continue to monitor both primary market and associated secondary market activities closely, including for any misconduct by market participants, throughout this period during which some market volatility could arise.”
The FCA has indicated that its priority areas for monitoring will be: “order book reporting, suspicious order and transacting reporting, inside information disclosures, price movement monitoring, and reporting on net short positions and the FCA will use its powers to request information and make enquiries where behaviour that may be abusive or creating a disorderly market is identified.” The FCA also warned “market participants to be aware of the FCA’s significant detective capabilities” with respect to insider trading.
More positively, the FCA has also said that it “recognises the challenges for firms in making the systems and operational changes required”. It confirmed that it intends to take “a pragmatic approach to any issues should they arise,” provided “firms can demonstrate that they have taken all reasonable steps to prepare.”
For any further information on this or any other funds-related topic, please contact author Verena Charvet as below:
Verena Charvet MBA,
Solicitor and Senior Partner at Merlys
Contact/Call us at Merlys | +44(0) 20 8154 6031
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This briefing note is intended to act as general guidance and is not intended to offer specific legal advice. Merlys is very happy to assist you with any aspect of the content in this article, as it relates to your business.