First Report Contents

Appendix 1: Correspondence on the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

Letter from Lord Trefgarne, Chairman of the Secondary Legislation Committee, to Mr John Glen MP, Economic Secretary to the Treasury

The Committee gave a first consideration to these draft Regulations at its meeting on 9 October. A number of questions arose, and we would be grateful if you could reply to these in advance of our next meeting.

We received information from your Department about the likely volume of applications that the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) might receive under the “temporary permissions regime” proposed under these Regulations.

Against a total number of some 7,700 EEA-based firms now registered to passport into the UK, we were given an estimate of some 160 applications that the PRA might receive, while we were told that the FCA is assuming that just under 1,000 firms may wish to use the new regime.  The level of applications will be a critical factor for the ability of the PRA and FCA to operate the new regime.  Have the estimates that we were given been further refined and, if not, are you confident that these estimates are a sound basis for planning?

We noted that the draft Regulations propose to give your Department the power to extend the length of the regime, by no more than 12 months at a time, in certain circumstances; and that this power would be exercisable by statutory instrument subject to negative resolution.  Such an extension could well attract much Parliamentary interest: can you say more about why you consider that the negative procedure is appropriate in this case?

Finally, the draft Regulations relate to the position of EEA firms operating in the UK. While this is of course outside the scope of the Regulations, please could you say what you anticipate will be the position of UK firms operating elsewhere in the EEA once the UK has left the EU?

10 October 2018

Letter from Mr John Glen MP to Lord Trefgarne

Thank you for your letter concerning the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which were laid before Parliament on 5 September.

You firstly asked about the number of applications for full UK authorisation that the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) have estimated they will receive from EEA firms. The estimates my department provided you last month do carry with them an unavoidable degree of uncertainty. However, they reflect my officials’ consultation with the regulators and are sensible working assumptions that will continue to be kept under review. I am confident that both the PRA and the FCA are making adequate preparations and effectively allocating resources ahead of March 2019 and the start of the temporary permissions regime. The draft regulations are designed to provide the regulators with the discretion to operationalise the regime as is necessary to discharge their regulatory functions. For example, the FCA- who are expecting many more applications than the PRA- will issue firms in the regime with a specific time period in which to make their application (a ‘landing slot’), which will further enable the FCA to manage the flow of applications appropriately.

These applications are made and assessed through the same procedure as usual applications for full UK authorisation. A notable difference, in a no-deal scenario, is the expected increased volume of applications as EEA firms that currently operate in the UK via a passport will be required to seek authorisation from the PRA or the FCA to continue operating in the UK. In addition, this will include applications from large and complex businesses with a substantial UK presence. The regime will ensure continuity and certainty for the UK’s financial services sector and its customers and will significantly reduce the operational challenges that would otherwise face the PRA and the FCA. Without this legislation, to continue operating in the UK all EEA firms would have to be granted full UK authorisation by exit day.

In the context of the uncertainty surrounding the numbers of firms that will end up joining the regime and the varying degrees in the complexity of their applications, my officials and I consider it necessary to have a power to extend the length of the regime, which would be crucial in alleviating the potential scenario that some EEA firms cannot be authorised within three years from exit day. The choice of procedure is appropriate given the overall powers and purpose are scrutinised now through this affirmative instrument, and the use of the negative procedure is for an extension alone.

The Treasury would not be able to modify the time limits set out under these regulations as a matter of course but only if it considers it “necessary” to do so. Its use of the power would also need to be based on a robust assessment from the FCA and PRA regarding the effects of extending and not extending the period on the affected firms in general, the UK financial system and the ability of the regulators to discharge their functions in a way that advances their statutory objectives.

Finally, concerning the status of UK firms operating in the EEA after the UK has left the EU, the UK and the EU have agreed the terms of an implementation period that will start on 29 March 2019 and last until 31 December 2020. During this period access to each other’s markets will continue on current terms, and businesses, including financial services firms, will be able to trade on the same terms as now until 31 December 2020.

In addition to agreeing the terms of an implementation period, the government has proposed a new economic and regulatory arrangement with the EU which would expand the scope of cross-border activity beyond existing ‘equivalence’, and ensure structured dialogue to manage regulatory change in future. Our proposal recognises the importance of autonomous decision making for the EU and UK, alongside the need to maintain the economic benefits of the most important financial services traded between us. It is a credible and negotiable model for the future EU-UK relationship in financial services.

The government has every confidence that a deal will be reached and the implementation period will be in place. However, in the unlikely event of a no deal scenario, the UK authorities are not able through unilateral action to influence the status of UK firms operating in the EEA.

The UK government and regulatory authorities are committed to working with EU partners to mitigate any risks that might result from this.

Many UK financial services firms who currently passport into the EEA are taking steps to ensure that they could continue to operate after exit, for example, by establishing a new EU authorised subsidiary. This would allow the UK firm to offer new services after exit through its EEA subsidiary, and in some cases existing contracts could be transferred to the new entity.

I hope this is helpful.

15 October 2018

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