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Brexit: FCA's guidance for dealing with your EEA clients

[fa icon="calendar"] 27-Feb-2019 16:41:10 / by James Borley

James Borley

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Several weeks ago, our Managing Director Jamie Cooke wrote a blog which discussed the position of UK-authorised firms with regard to EEA-resident clients. He pointed out that in the case of a ‘No Deal’ Brexit, a passporting UK firm will no longer be able to actively solicit EEA-based clients and discussed the lack of clarity regarding business initiated exclusively at the discretion of EEA-based clients.

To try to help clear some of the regulatory fog, the FCA provided some verbal guidance last week in one of their regular Brexit briefings for financial services firms, which my fellow fscom director Alison Donnelly attended as a representative of the Emerging Payments Association (EPA). They also committed to publish more detailed guidance within the next week with regards to the implications for UK-authorised firms of a no-deal Brexit.

FCA’s guidance

At the meeting, the FCA provided two principles for firms to consider when engaging with EEA clients in the event of a no-deal Brexit.

  1. The FCA expect firms to act lawfully regarding EEA clients
  2. Firms should seek to prevent consumer detriment as a result of the loss of passporting rights

Acting lawfully

The first principle entails firms checking - on a jurisdiction-by-jurisdiction basis - the legal position on servicing existing EEA clients when having no physical presence nor engaging in any marketing in that jurisdiction.  Essentially, this means that the FCA expects UK-based firms to respect the position of EEA Member States even if, from a UK regulatory perspective, there would be no issue in offering such unsolicited services online.

It is therefore important to note that some Member States have proposed offering a transitional period for UK financial services firms passporting-in.

For example, the Dutch regulator, the AFM, have published a “notification form for investment firms from the United Kingdom”[1], which investment firms can avail of to continue to offer investment services in the Netherlands in the case of a no-deal Brexit. In this case, the exemption will last for a maximum of two years.

The German Federal Ministry of Finance has also set out initial plans[2] in the event of a no deal Brexit. Through draft amendments to the German Banking Act, Germany intends to allow firms already operating through the passporting regime to continue servicing the country in relation to “financial services, which are closely connected to contracts that existed at the time of the withdrawal.”

While a clear definition of “closely connected” is not provided, this does provide some hope that firms will be able to continue servicing existing clients based in Germany, if only for a transitional period. Indeed, the draft text goes on to say “the transitional period starting at the time of the withdrawal may not exceed a period of 21 months.”

The Italian Ministry of Economy and Finance has also drafted legislation[3] which will provide a transitional period for UK financial services firms currently passporting into Italy.

It will, therefore, be for firms to seek jurisdiction-specific advice to determine whether they can continue to service clients in a particular Member State.

However, even in the case of where a Member State does not have a similar exemption in place, the question remains as to whether the laws of the jurisdiction, as well as the approach of the regulators, is conducive to allowing UK firms to continue to service existing clients.

Remember also, that if you conclude that such contracts may be allowable under the law of the particular Member States, you will also want to consider issues such as the enforceability of the contract, given that the client is located in a different regulatory and legal jurisdiction.

Consumer detriment

The second principle asks firms to consider the detriment caused to consumers of particular products in the event of a cliff-edge Brexit on 29 March. This envisages scenarios where the abrupt cessation of financial services would cause tangible harm to EEA customers. Examples would include where FX derivative contracts are no longer honoured, or where holidaymakers can no longer use their multi-currency prepaid travel cards abroad. In such cases, the FCA would expect such contracts to be honoured.

While definitive guidance has not yet been provided, such firms may be expected to adopt an orderly wind-down of existing EEA business in the case of a no-deal Brexit. It is clear at this stage however that the FCA does not expect UK firms to be able to retain their EEA client books indefinitely.

Furthermore, it is not apparent that the immediate cessation of business would cause significant consumer detriment across all categories of financial services firms. For example, payment institutions require all funds to be held with a corresponding payment instruction, and therefore receive funds as and when customers require payments to be made. Were payment institutions unable to offer payment services to EEA customers, those customers could easily switch to alternative providers based in other EEA states.

Risk-based approach

While the FCA’s guidance does provide some steer in terms of the factors firms should consider in relation to existing clients and unsolicited new clients, there remains much regulatory uncertainty. Firms would therefore be advised to adopt a risk-based, jurisdiction-by-jurisdiction approach to this matter.

If you require further advice concerning the implications of Brexit for passporting rights, or with regards to an authorisation application in another EEA Member State, please do not hesitate to contact us.

Get in touch

[1] http://www.digitaal.loket.afm.nl/en-US/Diensten/Beleggingsondernemingen/Melding/Pages/aanmelding-beleggingsonderneming-artikel10.aspx

[2] https://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/Abteilungen/Abteilung_IV/19_Legislaturperiode/Gesetze_Verordnungen/Brexit-StBG/2-Regierungsentwurf.pdf?__blob=publicationFile&v=3

[3] http://www.mef.gov.it/en/ufficio-stampa/comunicati/2019/comunicato_0015.html

Topics: FCA, Payment services, BREXIT, ESMA, Investment firms, MIFID II, authorisation, passporting

James Borley

Written by James Borley

Director at fscom

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