At the point that the UK leaves the EU, in a no deal scenario, it will become a "third country" to the EU. This means that any incoming EEA firm will no longer be able to operate in the UK ("passporting"). To continue as they did before, an incoming EEA firm would need to seek authorisation from the UK regulatory authorities.
In order to mitigate the immediate impact of this, relevant incoming EEA firms passporting into the UK will be able to enter into a Temporary Permissions Regime (TPR) that will enable them to continue to operate in the UK after their current passport falls away on 29 March 2019. The UK government first announced these measures in December 2017 to allow firms to continue to operate in the UK within the scope of their current permissions for a limited period after exit day. The regime is intended to provide sufficient time for those firms to seek full UK authorisation.
The FCA has now published its proposed rules for the TPR. These were set out in its December 2018 consultation paper CP18/29. These were followed by a second consultation paper (CP18/36) on specific issues that have arisen under the FCA's Handbook (for example, its plan to extend new requirements to senior managers under its SM&CR regime) for firms operating with a temporary permission. Both of these consultations are ongoing at the time of writing, so adjustments to the TPR should be expected throughout Q1 2019. The following is an overview of the TPR for the payments sector as it appears so far.
Overview of the TPR
The TPR enables those EEA firms that are currently passporting into the UK to notify the FCA and receive a "deemed to have" permission under Part 4A of the Financial Services and Markets Act "FSMA". The scope of a firm's permission under the TPR will reflect their pre-Brexit passporting permissions.
Timing of notification
In order to use this regime, the firm must have submitted a notification to the FCA by the end of the day on 28 March 2019. Notifications need to be made by submitting the appropriate forms on the FCA's Connect system, which is already open to those wishing to join the TPR. It will not be possible for any firm to benefit from the TPR if they have not delivered their notification before the deadline. The TPR will then come into force at 23:00 on 28 March 2019.
Which firms can use this regime?
To use the regime, the firm must have a passport before exit day, whether that is passporting via a branch in the UK or on a services basis. The following passporting firms are able to use the regime:
- Firms possessing passports under Schedule 3 of FSMA (including firms with top up permission).
- Treaty firms under Schedule 4 of FSMA that qualify for authorisation before exit day (including firms with top up permissions).
- Electronic money and payment institutions exercising passporting rights under the second Electronic Money Directive (EMD2) or the second Payment Services Directive (PSD2) and registered account information service providers.
This summary is focused on the TPR for the payments sector, including:
- Payment institutions (PIs).
- Electronic Money institutions (EMIs).
- Registered Account Information Service Providers (RAISPs).
Legislation for TPR
For the payments sector, the TPR has been created under The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. These Regulations have been brought into effect as part of the UK government's planning for a no deal scenario, under the EU (Withdrawal) Act 2018. These Regulations address failures of retained EU law to operate effectively and other deficiencies arising from the withdrawal of the UK from the EU. Schedule 3 creates the TPR for the payments sector.
The TPR will last for a maximum of three years.
Leaving the TPR early
Having entered the TPR, it is still possible for a firm to decide not proceed with their plans to continue operating in the UK. The TPR has been designed to allow firms to continue their UK regulated activities for a limited period while working towards authorisation in the UK for the business they want to undertake.
Firms that wished to leave the TPR would first need to cease all UK business and then submit an application to cancel their temporary permission.
Inside the TPR
Firms that have provided the relevant notification will eventually be allocated a three-month application period or 'landing slot' by the FCA. They will be expected to submit their application for full UK authorisation within that time period. The FCA will advise firms of their landing slot shortly after exit day. The first landing slot will run from October to December 2019, after which there will be five separate slots with the last landing slot closing at the end of March 2021. All applications are to be made via the Connect system.
Where a firm does not apply during its designated landing slot, withdraws its application without submitting another or where the application is unsuccessful, the FCA will cancel the firm's temporary permission.
The requirements to meet when inside the TPR are set out in the EU Exit Regulations discussed above. These include a set of additional notification duties for firms if there are any material changes affecting an earlier notification of intention, a cancellation or variation of their home state authorisation or any regulatory action taken against them or adverse judgments given against them in their home state. There is also a duty to notify the FCA if they intend to engage a distributor though whom electronic money will be distributed or redeemed. Beyond this, most of the rules that EMI, PIs and RAISPs need to comply with are contained in the EMRs and PSRs, but some of the FCA's rules will also apply to them.
All firms within the TPR will be supervised by the FCA in line with its supervisory approach. These rules and how they apply to the payments sector are explained in Chapters 4, 5 and 7 of CP18/29. The FCA is proposing that PIs, EMIs and RAISPs in the TPR must comply with the proposed rules on contributing to the costs of the Single Financial Guidance Body, be included within the jurisdiction of the Financial Ombudsman Service and be subject to the FCA's complaints rules and guidance, and the provisions on funding the TPR. As mentioned above, the FCA has an additional and separate consultation ongoing which deals with a number of issues around precisely how the FCA rules and guidance will apply to firms operating with the TPR.
The TPR will operate differently in some respects for the payments sector. Those differences include the following:
- The use of agents: any PIs, EMIs and RAISPs wishing to use the TPR must include in their notification details of their existing agents that provide payment and e-money services in the UK. Unless this notification has been given and those agents appear in the FCA's register on its website, agents will not be able to provide services in the UK on their behalf.
- Safeguarding requirements: incoming EEA PIs and EMIs must comply with the safeguarding requirements of the amended PSRs and EMRs in relation to their UK customers' funds. If requested, they must also be prepared to provide information to the FCA to demonstrate that arrangements have been made to safeguard funds in line with PSD2 (Article 10) or EMD2 (Article 7) to protect the interests of payment service users against claims of other creditors.
- Transition to authorisation or registration: although incoming EEA PIs, EMIs and RAISPs will access the TPR in the same manner as other firms, the manner of leaving will be different for PIs and for most EMIs due to the different authorisation and registration conditions that apply to these firms. The different arrangements for leaving the TPR are as follows:
- EEA PIs will need to establish an authorised or registered UK subsidiary to provide services in the UK when the EEA firm's temporary permission ends. Any EEA EMIs that provide payment services which are unrelated to e-money issuance will also have to establish an authorised or registered UK subsidiary to provide services in the UK when the EEA firm's temporary permission ends.
- Both EEA EMIs (which only provide payment services related to e-money issuance) and EEA RAISPs will have to become authorised or registered to continue providing services in the UK when their temporary permission ends. These firms will not have to set up a UK subsidiary.
An additional requirement under the TPR regime for the payments sector is the need to provide a second notification to the FCA as to how the firm intends to leave the regime. This notification must be given within one year of exit day and the firm must indicate whether it intends to leave the regime by:
- Establishing a UK subsidiary;
- Becoming authorised or registered; or
- Running down their UK customer contracts.
The FCA has said it will provide details of how make this notification in due course.
Prepare now for the TPR
The FCA has a number of different webpages explaining the TPR and including links to helpful guides and information for making the notifications. Firms should review these and reach a decision as to whether or not they should proceed to make a notification of intention to apply for full UK authorisation even if they remain uncertain at the current time. Once the notification window closes at the end of 28 March 2019 they will not be able to access the TPR.
Incoming EEA PIs, EMIs and RAISPs wishing to continue to provide services in or into the UK should take advantage of the TPR, but should not leave submission of the notifications until the last minute. They should start their preparations now. In addition, they should also review the FCA's CP18/36 in order to identify the changes to conduct and FCA supervision which will take effect on exit day.