In its recent consultation paper the FCA describes the proposed temporary permissions regime (TPR) as “a bridge to our domestic regime”. The paper sets out how the TPR will operate, how firms can enter the TPR, how long it will operate for and the rules proposed to apply to TPR firms.

In the event of a no-deal Brexit, the TPR provides welcome clarity and a step back from the “cliff edge” for EEA firms passporting into the UK under the EU financial services directives. However the consultation underlines that this will only be a temporary reprieve from the requirement for a full UK authorisation. The consultation sets out the extra rules and the additional costs firms using the regime will be subject to. For dual regulated firms, the full requirements will become known only once the PRA has published its own consultation on the TPR, due later in the Autumn.

The TPR covers EEA firms passporting into the UK under FSMA, Treaty firms, EEA electronic money and payment institutions (EMIs/PIs) and EEA registered account information services providers (RAISPs) passporting into the UK. In addition the paper deals with EEA investment funds marketed in the UK (not covered further here). Provided it has given notice to the FCA, a firm will be granted a temporary permission to undertake the regulated activities covered by its passport as at exit date in the UK as if it were an authorised firm under FSMA. The FCA’s powers will be extended to cover those matters which were previously for the firm’s home state under EU law.

The maximum period for the TPR is three years. However, in practice the period may be shorter for many firms. The FCA will choose when a firm in the regime has to submit a full application for UK authorisation by giving each firm a three month “landing slot”. The first landings slot will be October to December 2019 with the last landing slot being January to March 2021. Firms will have to apply to be in the TPR before exit day but will only know which landing slot will apply to them when the FCA issues a direction after exit day. Therefore a firm entering the TPR must be prepared to submit a full UK application within nine months of exit day.

Once a firm is in the TPR any addition to a firm’s regulated activities will be possible only as part of its overall application for full UK authorisation. Therefore those EEA firms wishing to expand activities in the UK within the three years following March 2019 might wish to expand the scope of their passported activities before exit day so as to ensure such business can be conducted prior to full UK authorisation being granted, especially given the FCA is will set the time when the firm can apply for authorisation.

A firm can cancel the temporary permission and withdraw from the TPR if it has ceased all UK regulated business. This would include circumstances in which the firm determines that it can rely upon an exclusion (such as the overseas persons exclusion) so that it is not carrying on regulated activities in the UK.

In deciding which rules should apply to TPR firms, the FCA’s overarching aim was to “preserve the status quo as much as possible”. In addition to the rules that currently apply to such firms, any FCA rule which implements a requirement of an EU directive which is currently reserved to the home state will apply, although the FCA will accept “substituted compliance” for those rules allowing firms to continue to comply with the relevant home state rule. Firms will need to demonstrate to the FCA that they continue to comply with home state rules in respect of the UK business (even if on a voluntary basis). In addition certain other FCA rules necessary for consumer protection and relating to funding requirements will apply.

The FCA has confirmed that it is not proposing to apply any home state rules relating to capital adequacy (including liquidity) since it is not practicable for it to oversee the firm’s worldwide capital position.

While the principle is clear, the actual process for firms determining which FCA rules will apply to them, is complicated. The FCA will set out an overarching rule in GEN rather than specifically tailoring each sourcebook for TPR firms. Firms will need to check the pre-exit day Handbook (available on the FCA website) to see which rules applied at exit day and check for changes made to these rules arising from Brexit (including via binding technical standards), plus any further rule changes proposed and made in the Handbook.

The FCA’s Principles for Businesses will apply to TPR firms with the exception of financial prudence (Principle 4).

In respect of rules for consumer protection, the main rules to apply relate to client assets and a new chapter of CASS will set out the requirements. Whilst substituted compliance will be accepted for client assets, there are extra reporting requirements, a requirement for firms subject to MiFID 2 to provide the client asset audit report to the FCA upon request or where there is a negative report, and client disclosure requirements for client asset treatment upon insolvency. The disclosure must be made in English and at the start of the TPR for existing clients and in “good time” before the firm safeguards client assets or money for new clients.

The senior managers and certification regime (SM&CR) will apply (as currently) to incoming EEA branch firms which accept deposits and the FCA has proposed this be extended to FCA solo regulated firms. The FCA plans to maintain the current requirements that apply to EEA branch firms under the SM&CR (or from the date the SM&CR commences for solo-regulated firms) throughout their time in the TPR. The full SM&CR requirements that apply to UK branches of third country firms will apply only once the firm is fully authorised as a third country branch.

Inwardly passporting EMIs, PIs and RAISPs using agents in the UK or another EEA state to provide payment and e-money services in the UK will have to notify the FCA (as part of the TPR notification) of such agents. EEA EMIs and PIs using the TPR will have to comply with the UK safeguarding requirements set out in secondary legislation in relation to their UK customers’ funds and the FCA may request information to demonstrate that arrangements made to safeguard funds will protect the interests of payments service users against other creditors (in line with the revised Electronic Money Directive requirements). PIs and EMIs which provide payment services unrelated to e-money issuance will need to establish an authorised or registered UK subsidiary to provide services in the UK when the firm’s temporary permission ends. EEA EMIs providing payment services related to e-money issuance or RAISPs will have to become authorised or registered with the FCA by the end of the TPR but will not have to set up a UK subsidiary.

Firms entering the TPR will be required to pay FCA periodic fees, contribute to the Single Financial Guidance Body levy and pay fees in respect of the Financial Ombudsman Service on an annual basis starting from 1 April 2019 generally on the same basis as UK firms. In addition, where relevant, firms will be required to pay the FSCS levy and the illegal money lending levy.

The TPR, whilst not without additional costs, does provide EEA firms currently operating in the UK with a clearly defined way forward. The deadline for comments on the FCA consultation is 7 December 2018.