FCA temporary permissions regime in the UK. What will happen with FinTech after Brexit?
On the 1st of October 2020, the Financial Conduct Authority (FCA) published an updated version of its Handbook that outlines the rules which will apply in the post-transitional period. In addition to that, the FCA revealed how it intends to employ its Temporary Transitional Power (TTP) and how the Temporary Permissions Regime (TPR) will look like in the UK. If you’re interested in learning more about the future of the financial services sector in the UK and EU, as well as points of their synergy, this article is for you. I will outline the regulatory changes that will take place and consider what should be done by firms to remain compliant with their obligations.
The end of a lovely story
Brexit, the strive of the UK to become independent from the EU, has brought mayhem into the national politics and economic uncertainties on an international level. It has impacted each sector and may have grave consequences for both the EU and the UK. The UK is a leading exporter of financial services not only in the EU but worldwide, having trade surplus from financial and related professional services more than the US and Switzerland combined. In 2018, the UK’s financial and related professional services export, including banking, reached a record high of £62.5 billion. To put it in context, the EU accounted for over £26 billion of total UK’s financial services exports, i.e. 41.6% of total financial services exports. Undoubtedly, with the end of the transition period on the 31st of December 2020 and the reimposition of trade barriers, these numbers will change.
In this regard, a couple of questions arise. What will the financial services sector look like after the transition period? How will the UK and its main export partner for financial services structure their relationship? I dedicated this article specifically to this topic, and I will explain how the Temporary Permissions Regime in the UK and EU may help the financial service sector not to fail and continue to operate after the Brexit.
Is the end of the transition period truly the end?
When the transition period ends, regardless of the type of Brexit (i.e. with a trade deal or without), the operation of financial services on a cross-border basis between the UK and EU will change drastically. Of course, that does not have to be the case if the sinking ship called Brexit is abandoned at once. It is safe to assume however that, at this stage, such an event is hardly possible. Nevertheless, it could still be possible with the ever-growing dissent to actions of government and damage to economies already inflicted by Covid-19. Just a note, I’m not planning to look into the political implications here since as the past has shown, anything can happen, and unless you’re Vanga, you can’t confidently predict how the negotiations will end.
The FCA has recognised that given the significant volume of the onshoring changes to which regulated firms and consumers would need to adjust to in a short timeframe, it would be impractical to demand compliance on the 31st of December 2020. Therefore, the FCA has stated that, in certain instances, there will be postponement for compliance with the changes. So now let’s look at what the FCA has brought to the table and how it reassures firms in both the EU and the UK on the future of cross-border financial services.
Postponement of changes coming into force
The FCA has noted that the changes for some of the regulatory duties will take effect, not on the 31st of December 2020, but rather a couple of years later- on the 31st of March 2022. The FCA clarified that such ‘standstill’ will apply broadly with targeted exceptions that will need to be complied with from the 31st of December 2020 and stemming from onshored legislation. When deciding which changes to postpone, the FCA considered the following points:
- where a failure to meet the onshored requirements would adversely affect the advancement of FCA’s key objectives, viewed collectively,
- where the FCA has a material supervisory concern about the delay in firms’ or other regulated persons’ compliance, and
- where compliance with pre-exit requirements is impossible or impracticable.
This broad direction applied to all regulated sectors, not solely that of payments. For the sake of this article, I won’t go into details regarding the applicable changes in all sectors. I will instead focus on those that apply to payment and e-money institutions.
What should UK payment and e-money institutions expect?
To figure out how the life will change for UK payment and e-money institutions, first of all, we need to look at 2018 No. 1201 The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 (PSR 2018 EU Exit). This piece of legislation acts as an amendment to the Payment Service Regulations 2017 and details many points that referred to the EU-wide supervision. Broadly speaking, it repeals passporting rights, consolidates regulatory power solely within the UK, changes references from EU legislation to equivalent national legislation, and similar.
Changes to the AML/CTF regime
Similar amendments are happening with other regulations and legislation that apply to the payment service providers. I want to underline for you some changes in the AML/CTF legislation, and specifically the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 (MLR EU Exit 2020) that detail the post-EU era of regulation in the UK. The MLR EU Exit 2020 update the existing UK anti-money laundering (AML) legislation to implement changes in the EU AML framework and make minor corrections and other minor amendments. The instrument also addressed the deficiencies that would otherwise arise from these amendments at the end of the transition period. The obligations for the institutions, however, remain substantially the same. Furthermore, Wire Transfer Regulations 2015/847 (WTR) will become a UK legislation at the end of the Brexit transition period under the European Union (Withdrawal) Act 2018 (EUWA), with minor amendments such as changes to the localisation referring to the UK instead of the EU.
Notably, because of Brexit the UK now has the power to opt-out from the EU legislation. And it decided to employ this power while opting-out from the implementation of legislation based on the 6th Anti-money Laundering Directive that is due to enter into force across the EU on 3rd of December 2020. The reasoning of the UK government was that its legislation is already consistent with the directive and therefore no amendments for the legislative framework are needed. However, there are a couple of exceptions- one related to vicarious liability where failure to prevent would make the legal person liable for the offence of money laundering if a person in charge, whether through negligence or intention, led to the commission of the money laundering offence and the legal person derived the benefit from it. And the second point, the list of 22 offences that will be codified as predicate offences across the EU to add consistency.
End of passporting and birth of temporary permissions regime in the UK
It is not a secret that the passporting regime under the Payment Services Directive (2015/2366) will end for payment service providers that provide services from and to the UK. However, the FCA confirmed that the registration window for the Temporary Permissions Regime reopened on the 30th of September 2020. Hence, EU-based PSPs will be able to provide services within the UK for some time subject to the registration with the FCA. When speaking about the outward passporting, the FCA has stated that, in general, there is no prohibition for FCA authorised firms to provide services within the EU. However, they should check the approach of the regulators located in the jurisdiction to which the services are to be provided. This means that each and every country’s regulatory guidance must be reviewed in order to ascertain in which jurisdiction the services can be provided without breaching regulatory obligations. Additionally, there is no prohibition of provision of services in case the clients themselves come to the company, and it remains the firm’s discretion whether to establish a relationship with non-residents. At the time of writing, no equivalent scheme to the TPR is being offered/operated by any other EU/EEA regulator.
Another interesting aspect, which was already discussed by us in our safeguarding guide, concerns change to the definition of credit institutions suitable for safeguarding. The PSR 2018 EU Exit states that the safeguarding may be done with an “approved foreign credit institution”, which encompasses:
“(a) the central bank of a State that is a member of the Organisation for Economic Cooperation and Development (“an OECD state”),
(b) a credit institution that is supervised by the central bank or other banking regulator of an OECD state,
(c) any credit institution that—
(i) is subject to regulation by the banking regulator of a State that is not an OECD state,
(ii) is required by the law of the country or territory in which it is established to provide audited accounts,
(iii) has minimum net assets of £5 million (or its equivalent in any other currency at the relevant time),
(iv) has a surplus of revenue over expenditure for the last two financial years, and
(v) has an annual report which is not materially qualified.“
Therefore, UK authorised institutions would not require holding a safeguarding account solely with EEA authorised credit institution but could employ foreign institutions for that matter. However, they can do that so long as they adhere to other requirements that apply to the safeguarding of customer funds.
How to ensure your compliance?
Depending on the type of authorisation, localisation of your institution, and the clientele that you serve, there is a variety of points you must consider to be compliant post-Brexit. It would be complicated to outline all of these points in this short article. Therefore, I advise you to reach out to PSP Lab to learn more regarding the temporary permissions regime and how the UK and EU-based payment service providers should structure their work after Brexit.