FCA’s Approach to International Firms

The FCA has published a consultation (CP20/20) on its general approach to international firms. The consultation and the finalised approach document published after consultation are intended to provide guidance that will help international firms understand the FCA’s expectations as they prepare for their applications for UK authorisation, informing firms’ decision about how they might want to structure their businesses to provide regulated financial services in the UK. The final approach document will supplement the FCA’s existing guidance on its approach to authorisation and supervision.

While the publication is not specifically focussed on Brexit, it will be of interest to those firms who have submitted notifications to enter the UK’s Temporary Permissions Regime (TPR) with a view to obtaining full authorisation in due course.

The FCA is requesting feedback to CP20/20 by 27 November 2020.

Highlights

• UK presence: The FCA expects firms to have some form of UK presence. This will impact international firms that do not have any UK presence but wish to be authorised to operate in the UK in future, such as those currently relying on an EEA services passport to serve UK customers.
• Branch and subsidiary: Although the FCA acknowledges that the use of branches is an established part of the UK’s financial services landscape, it notes that, without appropriate mitigation, certain potential harms could be more likely to occur where the regulated activities are undertaken by international firms from branches rather than through UK-incorporated subsidiaries. Therefore, when assessing an international firm, the FCA will have regard to whether there is a heightened potential to cause harm from the activities being undertaken from a branch and whether the risks can be adequately mitigated.
• Providing cross-border services: The FCA notes that where firms provide services to UK customers from anywhere outside their UK establishment, additional risks of harm may arise (for example, cover may not be available under the Financial Services Compensation Scheme (FSCS)). Where the FCA identifies specific risks arising from the provision of services cross-border, it will work with firms to identify mitigations, which could include imposing limitations or requirements on the permission granted.
• Authorisation under other regimes: All firms wishing to become authorised under Part 4A of the Financial Services and Markets Act 2000 (FSMA) should read the consultation paper. As the guidance focuses on the FCA’s objectives and the threshold conditions in FSMA, it is not aimed at international firms seeking authorisation under other regimes (eg authorisation or registration under the E-Money Regulations 2011 or Payment Services Regulations 2017). However, the FCA has said that given the similarity between the threshold conditions in FSMA and the minimum standards in other legislation, it may be also be of interest to firms seeking authorisation under other legislation. For example, international firms that safeguard funds subject to the Electronic Money Regulations 2011 should also consider how risk of client asset harm might apply to them.
• Solo-regulated and dual-regulated firms: There are differences in the regulatory and supervisory frameworks applicable to dual-regulated firms and solo-regulated firms. Dual-regulated firms will need to consider both the PRA’s approach to the authorisation and supervision of branches of international banks and insurers as well as the issues raised in CP20/20. Dual-regulated firms in the TPR should note that the PRA intends to provide 15 months of transitional relief for two aspects of third country branch requirements:
  • Bank branch profit and loss reporting; and
  • Solvency II reporting related to the branch minimum capital requirement (MCR) and Solvency Capital Requirement (SCR) calculations.
• No intended change to status quo: The FCA emphasises that it is not proposing to change existing rules or other provisions in the FCA Handbook through the consultation. The FCA believes its approach to the authorisation and supervision of international firms to date has been appropriate and proportionate but that it would be helpful to set out its approaches and the factors it takes into account in a public document.
• Demand for authorisation: Given we are nearing the end of the transition period, the FCA expects that more EEA firms which will no longer be able to operate in the UK under a passport will seek to become fully authorised in the UK:
  • 1500 firms have so far notified their intention to enter the TPR;
  • FCA expects more EEA firms to enter the TPR following the reopening of the notification window on 30 September 2020.

Please find our full briefing here.