Almost there: FCA expectations for the end of the transition period

Late last week, Financial Conduct Authority (FCA) executive director, Nausicaa Delfas, delivered a speech at the UK’s “Regulatory Regime for Financial Services Summit”.

The speech gives further insight into the FCA’s priorities and potential concerns regarding the end of the Brexit transition period and highlighted the following key points.

Preparing for the transition period

The FCA noted that, even if a deal is agreed with the EU, it should not be assumed that it will mitigate outstanding risks in financial services. Indeed, in its latest October report, whilst the Financial Policy Committee concluded that “most risks to UK financial stability...  at the end of the transition period had been mitigated”, it did not rule out market disruption as the UK transitions to new trading arrangements with the EU.

The FCA and other authorities have, therefore, taken steps to prepare for scenarios at the end of the transition period and to minimise disruption. These include:

  • the FCA setting out its approach to the share trading obligation in the absence of mutual equivalence. The FCA confirmed that it will allow firms to continue to access UK and EU trading venues;
  • the Chancellor announced that HM Treasury will unilaterally grant the EU a wide range of equivalence determinations. The decisions cover various activities and will provide certainty to firms and their clients and counterparties. In some instances, the decisions will enable UK firms to continue using EEA products and services, and in others they will avoid increased cost and complexity for firms. Firms should consult the full list of decisions, and further information on the FCA’s website;
  • the FCA is finalising its work with HM Treasury to onshore EU legislation, which will ensure, at the end of the transition period, that firms have substantially the same regulatory requirements;
  • the FCA has updated its Handbook website to give firms a clear view of what rules will look like after the transition period;
  • the FCA announced in early October that it would use its Temporary Transitional Power widely to allow firms more time to adjust to most new requirements; and
  • as passporting will end on 31 December 2020, together with HM Treasury, the FCA has put in place a series of temporary regimes, such as the Temporary Permissions Regime, as well as the Financial Services Contract Regime.

Remaining “cliff edge” risks

Despite the efforts to soften the effects of the transition, some risks remain:

  • without mutual equivalence, the conflict between the EU and UK derivative trading obligations may affect firms, hampering their ability to trade derivatives;
  • UK firms may not be able to continue servicing EEA-resident customers, as there is no EU-wide version of the UK’s Temporary Permissions Regime;
  • UK pension funds will not be able to use the clearing exemption to the derivatives clearing obligation when transacting with EEA firms;
  • many of the temporary measures which EEA countries put in place to prepare for a “no deal” exit have lapsed. UK firms hoping to continue servicing customers in the EEA from 1 January 2021 will, therefore, have to comply with local law and meet regulators’ expectations by then; and
  • there are not yet any data adequacy decision so firms need to be prepared to enable the EU/UK transfer of personal data possible through, for example, contractual clauses.

Importantly, the FCA urges UK firms to take all reasonable steps to be ready ahead of the end of the transition period, for all scenarios.

Looking ahead: getting ready for a new environment

Looking ahead to 2021, the FCA flagged three key areas of focus:

  • the UK’s new regulatory framework – the FCA noted that it will continue to support openness and high regulatory standards and ensure that the economy can access capital in both difficult and more normal times;
  • the FCA’s role on the global stage – the FCA emphasised its commitment to international standards and cooperation, and its role in developing and maintaining such standards; and
  • UK’s future trade and market access – the FCA highlighted that it remains committed to openness in respect of financial services trade. In particular, the FCA noted that it is supporting the Government with technical advice on new trade and market access arrangements being developed with the EU and with other jurisdictions.