With the UK government’s desperate attempts to achieve a Brexit settlement having reached a crescendo, the FCA continues to make preparations for the worst case no-deal scenario. It has extended the deadline for firms and funds registering for the Temporary Permissions Regime (TPR) from 28 March to 11 April 2019, reflecting the recent delay to the process of UK withdrawal.
There appears still to be some uncertainty about who the regime applies to. This note updates our previous alert on the same topic, with the objective of providing certainty to our clients on the current position.
Who can make use of the TPR?
By way of reminder, the TPR is designed to address the cliff edge presented by a no-deal Brexit scenario. It is intended for inbound (to the UK) passporting EEA firms and investment funds; be they UCITS schemes or Alternative Investment Funds (AIFs), including European Venture Capital Funds (EUVECA), European Social Entrepreneurship Funds (EUSEF) or European Long-term Investment Funds (ELTIF) managed by EEA Alternative Investment Fund Managers (AIFMS) under the Alternative Investment Fund Management Directive (AIFMD). Such firms can apply to the FCA for a continuation of existing passporting arrangements.
What about UK AIFMs with EEA AIFs?
UK AIFMs wishing to continue marketing their EEA AIFs can do so on the same basis for a limited period. No further action is required until Q2 2020.
The Temporary Transitional Power (TTP), including so called ‘standstill’ powers afforded to the FCA, give it the right to temporarily waive or modify obligations that have changed under Section 8 of the EU (Withdrawal) Act 2018 (EUWA). In effect, firms will be able to continue to comply with certain requirements as they applied before 'exit day'.
The FCA has published a number of directions that exercise this TTP, including one which allows EEA funds managed by UK AIFMs to continue to be marketed in the UK. Specifically, the FCA Transitional Direction and related Annex A states that: so long as the EU AIF in question is currently marketed in accordance with Regulation 54 of the Alternative Fund Investment Fund Managers Regulation 2013 (‘UKAIFMR’) (i.e. the prevailing process for registering the marketing of EU AIFs in the UK) no further action is required until the standstill direction ceases (30 June 2020) (Annex A 1.1(3)).
Without this direction the relevant fund(s) would have required registration (prior to exit day) under the UKAIFMR 57, which implements Article 36 (marketing of third country AIFs by authorised AIFMs) of the AIFMD.
Should I apply in respect of UCITS funds?
Assuming you wish to carry on marketing the UCITS in the UK, yes! We understand that many EEA UCITS have already applied for a TPR permission. Note that applications must be made on behalf of the Scheme itself, rather than the delegated portfolio manager (to the scheme). Further information on how this can be done is found here. Also note the FCA’s confirmation that new sub-funds created after exit day will also benefit from the TPR, so long as the umbrella fund itself has been registered.
Other Brexit topics of note:
Have other EU regulators adopted similar measures to TPR?
We understand that a number of EU27 states have proposed transitional provisions that will provide a degree of continuity for firms and funds already doing business in or into that jurisdiction. These include, inter alia, Luxembourg, Italy, Belgium and Holland. These provisions vary in scope and scale and firms are advised to engage with local legal counsel on a jurisdiction by jurisdiction basis.
Delegation of portfolio management services to the UK
As seen here, the FCA has agreed Memorandums of understanding (MoUs) with European Securities and Markets Authority and also EU regulators which allow to for cooperation and the exchange of information. The agreement of the MoUs was necessary for the continued delegation of portfolio management activities under the AIFMD, UCITS and MiFID to UK domiciled firms. However, the MoU is not a replacement for EU directive passports, nor does it confer any equivalence determination. Therefore, this should be seen as a short to medium term solution only.
We have produced a simple guide to the various permutations for a typical buy-side firm under a no-deal Brexit, which can be downloaded here.
What are the FCA’s rule-making powers under a no-deal Brexit?
The rules were published at the end of February in near final form, with some of the relevant statutory instruments made under the EUWA still to be finalised. The handbook amendments can be found in Appendix 1 of Policy Statement 19/5. Near final Binding Technical Standards instruments – the detailed EU derived binding standards – are located in Appendix 2 of PS19/5.
As noted above the FCA has also published directions for the exercising of its TTP. The directions shall come into force on exit day in the event of a no-deal, applying for fifteen months until 30 June 2020.
What happens to the MiFID Share Trading Obligation?
In the meantime, the FCA and the EU have exchanged opinions on some MiFID related issues, including the share trading obligation – with the European Commission of the view that there is sufficient liquidity in the EU markets to render unnecessary an equivalence determination for UK trading venues. This has limited impact upon UK firms – the EUWA ‘on-shoring’ of EU rules will allow UK firms to continue to trade on EEA venues but does mean that EU firms are limited by the EU share trading obligation from accessing UK venues in respect of certain instruments (14 in total) which are deemed to have sufficient liquidity (in the EU), as outlined here. All firms may, though, need to be mindful of any potential fragmentation of liquidity arising from this.
How does a hard Brexit affect the EMIR reporting I undertake on behalf of clients?
Under a no-deal Brexit scenario UK firms will need to ensure that they can report to a UK trade repository (TR) on behalf of their UK clients and any non-EU domiciled AIFs they manage, and to an EU TR on behalf of their EU clients / EU AIFs. Firms should therefore check that their existing elected TR has the requisite entities to whom reports can be sent. Having done so firms will then need to ensure that their reporting framework is enhanced, where necessary, such that reports are submitted to the correct TR.
In the event that firms have previously been reporting to an EU domiciled TR they will additionally need to make arrangements for the porting of historic reports to a UK trade repository in respect of the reports submitted for UK clients and any non-EU domiciled AIFs they manage (and vice versa in respect of EU clients and EU-domiciled AIFs).
Most TRs have opened an EU domiciled entity to meet EU EMIR obligations and sought consent from their clients for the transfer of data between the different entities. Those firms using a delegated reporting service should check with their delegates that they will correctly port and report accordingly. Firms with both UK and EU clients will need to take particular care to ensure that reports for different clients are reaching the correct TR.
Aside from reporting, firms should also be prepared for additional complexity in respect of collateral exchange under EMIR – as UK clients, for example, will be subject to UK margin rules whereas executing counterparties in the EU will be subject to EU rules. In the event of regulatory divergence this could create further challenges.
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