As the countdown to 31 October 2019 can now be measured in weeks, the UK and the EU are hurtling towards a no-deal Brexit. This has implications for inbound passporting EEA firms as the UK Financial Services and Markets Act (FSMA) prohibits firms from carrying out a regulated activity in the UK, or purport to do so, unless they are either an authorised person or an exempt person.

Until Brexit, inbound EEA are entitled to exercise both the right of establishment and the right to provide services under a single market directive as long as these activities are included in its home state authorisations. While passporting firms qualify as an authorised person under FSMA and do not need a Part 4A permission to be able to continue carrying out regulated activities in the UK, those EEA firms that do not have a passporting right and/or does not have or does not wish to exercise a treaty right to carry on a particular regulated activity in the UK are required to obtain a Part 4A permission known as the “top-up permission” from the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA).

When the UK leaves the EU, the passporting rights will cease regardless of whether it happens with or without a deal. This means that inbound EEA firms currently operating through a passport in the UK under the existing European passport framework will require a Part 4A permission. But in the event that the Withdrawal Agreement is ratified, permanent PRA authorisation will only be needed by the end of the implementation period. Otherwise, the UK temporary permissions regime (TPR) will serve as a back-stop, providing inbound EEA firms with “deemed Part 4A permission” which will allow them to continue to be an authorised person for the purpose of FSMA for a maximum duration of three years.This will also apply to those EEA firms that have top-up permissions to carry on a particular regulated activity in the United Kingdom and they would be granted “a deemed variation” of their permissions.

The TPR will allow inbound EEA firms to maintain access to the UK market with a path to full authorisation. This means that they will be required to prepare their applications to be a fully-fledged UK authorised firm by applying for, and obtaining, a UK authorisation from the PRA and/or the FCA as appropriate. However, firms should note that they must already be authorised to carry on a regulated activity in the UK under the EU passporting regime at the point of exit. Otherwise,they will not be eligible for entry into the TPR. More importantly, they should take into account that their permission will cover only those activities that they were already permitted to carry on in the UK via passporting immediately before exit day.

So what should inbound passporting EEA firms do to be deemed to have regulatory permission to carry out regulated activities in the UK after Brexit? The legislation does not enable inbound EEA firms that have not applied for Part 4A authorisation or notified the regulator to enter the TPR automatically. This means that the inbound EEA firms currently passporting into the UK will need to notify the UK regulators of their intention to enter into the regime or by submitting a Part 4A permission application before exit day unless they have already submitted a branch application prior to the TPR Statutory Instrument being made, in which case they will automatically enter into the TPR. The FCA has extended the deadline for notifications for the TPR to the end of 30 October 2019 for the FCA-regulated firms. However, the PRA-regulated firms should note that the PRA’s deadline to notify PRA to enter the TPR has already passed and it is no longer possible to submit a notification. 

What happens if Brexit results in a change in the business or the UK operations of inbound EEA firms? Firms which will enter into the TPR should note that their entry will be based on their current permission set. This means that those inbound EEA firms that wish to change their business model post-Brexit should first enter the TPR and then seek removal of their unneeded permissions during the TPR. This is of course unless a Variation of Permission (VoP) has already been approved by the relevang regultor for the removal of that permission prior to entering the TPR. Firms should always remember that  before carrying out a new regulated activity or cancelling their existing permissions for those activities that they are currently carrying out they will need to obtain permission from the UK regulators. This also applies to firms that wish to vary their existing Part 4A permission. In order to add a new regulated activity or to remove a regulated activity for which they currently have permission, these firms will also need to submit a VoP application.

While dual-regulated firms must apply to the PRA for a change in permission for their regulated activities, firms which are solo regulated by the FCA must also apply to the PRA for a change in permission if they wish to add any PRA-regulated activities such as accepting deposits, effecting or carrying out contracts of insurance, or managing the underwriting capacity of a Lloyd’s syndicate as a managing agent at Lloyd’s. Solo FCA regulated firms that wish to carry out any other regulated activity should, on the other hand, submit their VoP applications to the FCA.

What if a firm wishes to wind down its UK business after Brexit? Those firms which plan to stop carrying on all regulated activities in the UK are required to inform the PRA within six months before submitting a cancellation application to cancel their Part 4A permissions. This means that, before applying to cancel authorisation, firms are expected to have already stopped carrying on regulated activities or be planning to do so within 6 months of the application. Firms should also note that, depending on their circumstances, in certain cases it might be more sensible approach to first amend their Part 4A permission through a VoP and then initiate the wind down process.

There are certain requirements that firms should take into account while cancelling their Part 4A permissions. In the case of a cancellation application, firms will be expected to have a clear and credible rationale for their application. They will also be required to provide an audited financial report to confirm that they have no current or future outstanding liabilities arising from any regulated activities. More specifically, they will be expected to present relevant documentation to evidence that they have considered the validity and implications of the arrangements entered into where they undertaken to transfer or cancel contractual obligations arising in relation to any regulated activities in the event of a transfer of business, and/or the completion of a wind down strategy. Those firms which hold client money will also be required to provide auditors’ reports or accounts letters.

For all PRA-authorised firms, the PRA leads the assessment but will have to consult with the FCA, which will be assessing the application against its own operational objectives of protecting consumers, ensuring market integrity, and promoting effective competition. While there is no fee associated with the cancellation application, firms will be required to pay the full annual fee for the financial year in which they apply for cancellation. Firms should note that the regulators allow firms to withdraw their application to cancel at any point. Firms can do so simply by emailing to the designated PRA case officer. There is no requirement to submit any form to effect the withdrawal and there is no fee charged for withdrawing an application. 

In terms of timelines, the PRA will be required to conclude an application within six months if a firms' application is deemed to be complete, or twelve months if otherwise. When the regulators require additional supporting documentation they will set deadlines for the submission of these documents. Firms will be expected to respond to those requests on time to ensure their cancellation application goes as smooth as possible. Finally, firms should note that as soon as the regulators grant the cancellation of their Part 4A permissions, all of their existing permissions and approvals will automatically be revoked. Taking these factors into account when considering submitting an application to wind down their business in the UK would help firms decide on the best course of action. 

Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official views and opinions of PwC.