Another week and another Brexit update from the Financial Conduct Authority (FCA). This latest update is titled ‘Brexit – what we expect firms and other regulated persons to do now’.

With 29 March advancing rapidly and the potential for a no-deal departure still looking a possibility, ‘firms and regulated persons’ are being told to take action in specific areas.

The FCA’s approach to Brexit

In June 2018, the regulator set out its role in and approach to preparing for Brexit.

Two consultation papers were published by the Authority in October, and in November, it launched a further consultation, focused principally on a number of amendments to its Handbook and Binding Technical Standards (BTS).

The FCA updated its advice to firms on 13 December, and on 7 January, announced that the notification window for the temporary permissions regime was open. On 8 January, it published two more Brexit consultations.

What is the FCA telling firms and regulated individuals to do?

On 1 February, the Treasury published draft legislation that would temporarily empower the FCA and the Bank of England/Prudential Regulation Authority (PRA) to make transitional provisions if the UK leaves the EU without an agreement in place.

The FCA sets out on its website how it intends to use this temporary transitional power. Broadly, it is intended ‘to ensure that firms and other regulated entities do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit’.

It also sets out the areas where it will not make transitional provision. In these areas, the regulator will ‘expect firms and other regulated persons to start preparing now to comply with these post-exit regulatory obligations’.

Which firms and individuals should start making their own preparations for Brexit?

The FCA singles out:

  1. Firms subject to the MiFID II transaction reporting regime, and connected persons (for example approved reporting mechanisms). The UK’s transaction reporting regime under MiFID II will change as a result of Brexit, including connected obligations such as the requirement to submit financial reference data.
  2. Firms subject to reporting obligations under European Market Infrastructure Regulation (EMIR). From exit day, all firms and central counterparties who enter into derivatives transactions in scope of EMIR will be required to report into a UK-registered trade repository.
  3. EEA Issuers that have securities traded or admitted to trading on UK markets. EEA entities that have securities admitted to trading or traded on UK markets will be required to submit information to the FCA and disclose certain information to the market from exit.
  4. Investment firms subject to the Bank Recovery and Resolution Directive (BRRD) and that have liabilities governed by the law of an EEA State.
  5. EEA firms intending to use the market-making exemption under the Short Selling Regulation. Any firm wishing to do this will be required to join a UK trading venue and notify the FCA of their intention to use the market maker exemption 30 days ahead of their intended use.
  6. Firms intending to use credit ratings issued or endorsed by FCA-registered credit ratings agencies after exit day. After exit, all ratings will need to be issued or endorsed by a credit ratings agency (CRA) established in the UK and registered with the FCA for them to be eligible for regulatory use.
  7. UK originators, sponsors, or securitisation special purpose entities (SSPEs) of securitisations they wish to be considered simple, transparent, and standardised (STS) under the Securitisation Regulation. UK originators or sponsors will need to direct notifications to the FCA from exit day for these securitisations.

If you fall into one of these categories, you should refer to the Annex of the FCA statement for more information.

What else do firms need to consider?

In addition to the specific requirements above, existing transitional arrangements such as, for example, the temporary permissions regime (TPR) will operate from exit day.

Firms and other regulated persons wishing to use these regimes should ensure they have completed the necessary steps by exit day to enter the relevant regime.

This may include submitting a notification to the FCA. More information on what you need to do is on the regulator’s website.

For some provisions, the effect of the temporary transitional power may interact with other proposed powers conferred on the Treasury.

Once the Treasury has set out how it intends to use these powers, the FCA expects to confirm its approach, including outlining whether it will use the temporary transitional power for these provisions.

What are the next steps? 

The FCA makes it clear that it is ‘conscious of the scale, complexity, and magnitude of some of these changes and consequently [intends] to act proportionately’.

This means that it ‘will not take a strict liability approach and [does] not intend to take enforcement action against firms and other regulated entities for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by exit day’.

Firms will want to ensure they have taken these ‘reasonable steps’ in good time to be prepared before 29 March.

The regulator says that it ‘will publish more information on how firms should comply with post-exit rules before exit day’.

We can expect to see more, and more detailed, guidance in the coming weeks.

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