Low Take-Up Of UK Temporary Permissions Regime By EEA Firms With UK Passports?

According to the FCA's figures in August 2016, the end of financial services passporting between the EEA and the UK was going to leave 5,476 UK finance firms potentially needing a new passporting 'hub' in one of the remaining 27 EU countries and 8,008 EEA firms potentially needing a UK base to cover their UK offerings. So, how many have acted?

There has definitely been a scramble by UK firms to set up in the EU27, although the figures are spread across multiple registers, and regulators do not disclose the numbers of applications that are still in progress. The Central Bank of Ireland claimed "well over 100" in September 2019, for example, with similar numbers thrown out by others. 

Not all firms might use their passports, of course. It's quite straightforward to take advantage of the passporting regime - a simple notification to your home state regulator, which then notifies the various host state regulators. And there's no obligation to actually use a passport. Many firms will have ticked the box for all EEA countries to avoid inadvertently committing an offence wherever their customers happened to reside. And the picture is perhaps distorted by non-EEA corporations who were using the UK as their passport hub, so their new Irish subsidiary would not count as an application by a UK parent.

There has been less pressure on EEA firms who operate under passports in the UK because the FCA offered a Temporary Permissions Regime (TPR) that allows them to continue trading for 3 years as if they were passporting. The registration deadline has been extended each time Brexit has been delayed, so the current deadline is 30 January 2020. However, it's likely that most, if not all, EEA firms that were intending to use the TPR option will have already registered, although some newly authorised firms could still squeeze in (e.g. new FinTech firms).

At any rate, the Financial Conduct Authority has responded to a Freedom of Information Act request with the news that 1,441 EEA-based firms had applied for the TPR by October 2019. Of those, 228 are based in Ireland, 170 in France, 165 in Cyprus and 149 in Germany. 

If this is to be considered a high take-up of the TPR option, then it would appear that only about 18% of EEA passports into the UK were actually being used. That's perhaps not unreasonable, given the tick-box approach to passporting to avoid inadvertently committing an offence in the UK in the event that they ended up with UK customers.

In any event, these 1,441 firms now have until 30 January 2023 to decide whether to set up offices in the UK and get authorised locally, to the extent they continue to serve the UK market.

Use It Or Lose It: The UK Temporary Permission (Passport) Regime

The UK's Financial Conduct Authority has told firms based elsewhere in the European Economic Area who rely on a 'passport' to offer their financial services in the UK to notify the FCA if they intend to use the UK "temporary permissions regime" (TPR). The Prudential Regulatory Authority has issued a similar direction to the banks and other firms it regulates.

Notifications to the FCA must be made by submitting the Temporary Permission Notification Form containing the necessary information via the FCA's "Connect" system between 7 January and 28 March 2019.

Firms that have not submitted a notification during that period will not be able to use the TPR.

The FCA told Parliament in 2016 that there are 8,008 EEA firms holding 23,532 passports covering their UK financial services offerings. 

UK To Give EEA Firms 3 Years Temporary Permission Post-Brexit

The UK proposes to grant temporary permissions to EEA firms currently operating in the UK under EU financial services 'passports' to continue their UK activities, for three years after Brexit day. 

HM Treasury states that the regime will ensure that: 

• EEA firms can continue to carry out business as before, writing new contracts and servicing existing contracts entered into before exit day for the temporary period after exit day;
• EEA firms have appropriate time to prepare for and submit applications for UK authorisation and complete any necessary restructuring; and
• The PRA and the FCA can manage the expected applications for UK authorisation from EEA firms in a smooth and orderly manner.

The draft regulations are here and the explanatory information is here.

The FCA has published its own webpage on how it will implement the temporary permission regime (TPR).

Firms wishing to use the TPR must notify the FCA online between early January 2019 and at a date (not yet specified) prior to exit day. Such firms will be allocated a period within which they must submit their application for UK authorisation. The FCA expects the window to be October to December 2019 and the last to be January to March 2021. The FCA intends to consult in autumn 2018 on the rules that will apply to firms and funds in the TPR and a policy statement and final rules early in 2019.

Post-Brexit Outlook For Passported Financial Services

Well it's been a dismal six months watching the politicians shadow-box among themselves over what Brexit really means. There's no shared vision of the big picture, let alone any grip on the detail. What is clear, however, is that size matters in trade negotiations. So the larger trading partners like the EU will dictate their own terms in any deals. And while the application of logic seems to be prohibited in this 'post-truth' era, I intend to proceed on the basis that the UK will not even be a member of the EEA (or the Customs Union) - and that it certainly won't get a better trade deal with the EU than it has today. That means the only real job left for UK politicians is to figure out who gets pork-barrelled compensated by the UK taxpayer for being worse off for having to treat the EEA as a separate market (where they can't pass those costs onto their UK/EEA customers more).

While the car makers got in first, ejecting from the EU/EEA poses a very significant challenge, in particular, for the 5,476 of the UK firms relying on 336,421 'outbound' passports to avoid being authorised in every EEA member state. This works out at 61 passports per firm, which is somewhat strange given there are 31 EEA countries, but passports are counted for each separate directive that requires them (only one if a firm has several under the same directive). Brexit is also a challenge for the 8,008 EEA firms that hold 23,532 passports (about 3 each) to cover their UK offerings.

In essence, a total of 13,484 firms need to apply for 359,953 additional regulatory permissions over the next two years if they want to continue to make sure they can cover their existing markets.

Such applications don't come cheaply or quickly, and involve significant ongoing management and administration costs following authorisation. And because most of the work will be required abroad, the lion's share of the related fees and expenses will be charged outside the UK, worsening the UK's trade deficit even further. The UK can also kiss goodbye to the tax revenues on the earnings of each foreign firm, as well as the incomes of its management and staff...

But that's all water under the bridge (or out the English Channel, if you will).

During the next two years, any financial services firm based in the UK/EEA that relies on a passport for cross-border activities or ambitions involving the UK will need to pursue the following options, either organically or by acquisition: 

• Retain/obtain authorization for an entity established in the UK, if it wishes to serve the UK market;

• Obtain/retain authorization for an EEA-based entity to take advantage of the EEA passport regime for the remaining EEA countries;

• Seek to rely on any passporting arrangements that the UK may agree with non-EEA countries (these could only be formally agreed post-Brexit, but might be planned in the meantime);

• Obtain/retain authorisations in any non-EEA countries it wishes to target - as is the case today, but the cost/benefit of targeting some of these countries may now have changed, given the extra cost of authorisation to serve EEA markets, and perhaps jockeying among countries wishing to take advantage of the situation.

So where would you base your EEA-passport firm?

The relevant analysis, if not the outcome, will vary significantly depending on the type of financial services and markets involved. Most of the relevant passports relate to general insurance intermediation and trade in various securities/markets, but payment and e-money services represent the third most popular category with perhaps greater retail significance - here 350 UK firms rely on outbound passports and 142 EEA firms passport into the UK.  According to a report commissioned by the Emerging Payments Association, the 350 UK firms have six countries to choose from as a potential base for their EEA passport entity, based on criteria including the ease of making an application, supportive regulatory approach/attitude, ease of setting up and doing business, jurisdictional reputation and sovereign/political risk:

• Cyprus 
• Denmark 
• Ireland 
• Luxembourg 
• Malta 
• Sweden

While not wishing to disparage any of those fine jurisdictions, you will see from the commentary in the EPA report why the UK is walking away from a (literally) golden opportunity to continue its role as the preferred EEA passporting hub for financial firms (many of which are managed or staffed by people who moved to the UK for that reason).  Yet, while that commentary is very helpful and a useful lens through which to view options, I know from personal experience that it does not always reflect reality on the ground or capture all the criteria that are relevant to the decision for each firm - and the authors don't pretend that it does.

We are only at the beginning of a very long and expensive journey...