There are 8000 European Economic Area (EEA) firms using their EU financial services passports to do business in the UK, either through UK branches or accessing UK markets on a crossborder basis. What are the options for them?
The likely position is becoming clearer and can be very broadly summarised in the following seven statements:
1) There will no longer be a passporting regime.
EU passporting in its present form will disappear.
2) Passporting firms must either be authorised in the UK or find another legal basis for their activities.
EEA firms hoping to continue operating through UK branches must apply for authorisation in the UK.
Crossborder firms must either be authorised in the UK (i.e. as an authorised branch or subsidiary) or must rely on equivalence arrangements (see 6, below) or must rely on exemptions under UK law (see 7, below).
3) There will be deadlines for obtaining authorisation.
Passporting firms must inform the the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) by 29 March 2019 if they want to carry on doing business in the UK. They will then benefit from a temporary permissions regime, allowing them to carry on their present activities while they apply for UK authorisation. Any authorisation must be in place by 20 March 2022, but firms will be given ‘landing slots’ in which they must apply for authorisation or lose their right to do business in this way.
4) Some firms passporting via branches must set up standalone UK subsidiaries.
Carrying on as a branch is the ideal solution. In regulating non-passported branches, UK regulators look to the whole organisation, not just the UK arm. This can mean (for example) that a branch needs a smaller UK headcount and less capital required to be held in the UK. UK-incorporated subsidiaries must satisfy all regulatory requirements on a standalone basis.
For banks, the PRA will apply a series of complex tests to assess whether a firm must set up a standalone subsidiary. These involve (for example) systemic importance for the UK: the amount of business subject to the Financial Services Compensation Scheme and business done with small companies. There will be similarly detailed requirements for insurers and possibly other firms. Firms should discuss their business with their regulators in good time before they apply for authorisation.
5) Losing the passport will result in tougher regulation in the UK.
Under passporting, prudential and organisational matters are reserved to the home state regulator, so the UK regulators only get involved to a limited extent. For branches, UK conduct of business rules apply and a very limited number of individuals need to be approved by the regulators. For crossborder firms, the rules of the home state apply almost entirely. Passporting involves a very light touch regime.
This will change. Authorised branches will be subject to much more extensive obligations, even if not required to set up an authorised subsidiary. Crossborder firms may be able to do some business under equivalence regimes (see 6, below) or general UK law (see 7, below). Otherwise, they will also need to be authorised as branches or standalone subsidiaries. When a firm applies for authorisation, its entire business model can be re-examined.
6) EU equivalence regimes may be of limited assistance.
Under some EU legislation, there is the concept of ‘equivalence’. This allows non-EEA firms to access EEA markets where their home regulatory regime is assessed as equivalent to the EU. This may help some crossborder firms (such as those doing wholesale investment business or marketing investment funds to professional clients). There is no equivalence regime for many activities, including banking and payment services.
The UK government would like to build on equivalence as the basis for the future relationship with the EU: ‘enhanced equivalence’. There is no sign that the EU will agree to this.
7) UK domestic law is liberal (but unclear) on cross-border access without a passport.
Even without passporting, UK law allows a level of crossborder access, but a permanent presence in the UK always requires authorisation. However, the rules are not clear, and firms should seek detailed advice on their own position.
Relevant questions will be whether:
• the firm’s activities require authorisation in the UK at all (e.g. the UK does not regulate most corporate lending);
• the firm’s activities involve carrying on business in the UK (the test for this will vary depending on the activity);
• any marketing activity is within the UK’s financial promotions restriction(s); and
• the Overseas Persons exemption applies (this is a specific safe haven, mainly of benefit to firms doing wholesale investment business).
Tony Watts is a consultant solicitor at Keystone Law. He specialises in financial services and banking.