Following Brexit, European firms that were previously providing services in the UK (either through a UK branch or on a cross-border basis) in reliance upon passporting rights, are able to continue to do so under the UK’s temporary permissions regime (TPR) until they are assigned a “landing slot” by the PRA / FCA to apply for authorisation. These landing slots take the form of a direction sent to the firm which will specify a window (usually of 3 months) within which the firm must take one of the following steps:

1. apply for re-authorisation as a UK branch / subsidiary; or
2. decide to cease to provide services to UK-based clients altogether.

Firms that were previously operating on solely a cross-border basis and which seek FCA / PRA authorisation (under Option 1 above), will need to establish a physical presence in the UK in order to be locally regulated. For completeness, it is worth noting that in some cases the FCA / PRA will expect a subsidiary rather than a branch to be established, and therefore in reality some firms may have little choice in this regard.

A firm that decides to cease to provide services to UK-based clients altogether (i.e. under Option 2 above), or whose application for authorisation as a branch or subsidiary is refused by the FCA / PRA, will move into a run-off regime and will have 5 years to wind down any existing business (15 years for insurance business). During that time, the firm would be deemed to have a permission to carry on regulated activities that are necessary for the performance of pre-existing contracts and that are carried on for the purposes of performing such contracts. However, the firm will not be able to enter into new contracts with UK customers.

Some firms may determine that, despite having passported permissions historically, they are able to provide services into the UK on a cross-border basis without needing to be authorised in the UK. Primarily, the reasons for this conclusion will either be that the firm is not conducting regulated activities “in the UK” or the firm is able to rely on the UK’s overseas persons exclusion. In order to determine that the firm is able to provide services on a cross-border basis without needing to be authorised in the UK, detailed legal analysis will need to be conducted in advance. We are helping several firms with these assessments.

Some practical considerations

The approach that firms choose to take depends on a range of commercial and regulatory considerations and is fact-specific. However, there are a few points to note:

• Risk of dual regulation by the FCA / PRA and home state regulator: a subsidiary is considered to be a legally separate entity from its parent, whilst a branch is considered to be part of the same legal entity as its parent. The impact of this is that when the FCA / PRA authorise a branch of an international firm, that authorisation applies to the whole legal entity (i.e. the branch and head office) whilst for a subsidiary, FCA / PRA authorisation only applies to the subsidiary itself. This has a number of consequences from a regulatory compliance perspective, most notably that where a branch is established, in some scenarios both the FCA / PRA regulatory requirements as well as those imposed by the regulator of the head office jurisdiction will need to be applied simultaneously. This creates complexity that firms need to work through in some detail so they can understand the overlap and ‘gaps’ between different regulatory regimes that apply to both their head office, as well as their UK business.
• Liquidity / capital impact: subsidiaries are subject to stricter capital treatment and are expected to be financially resilient on a standalone basis. The FCA / PRA acknowledges that many subsidiaries of international firms have close financial and operational interlinkages to the wider group which they form part of and will work with other regulators to understand those linkages. In relation to UK branches, the FCA / PRA will primarily rely on the home state regulator to set appropriate capital requirements, although the FCA / PRA have the power to impose additional capital and liquidity requirements on a UK branch.
• Application of Senior Managers and Certification Regime (SCMR): SMCR applies in a fuller way to subsidiaries as opposed to branches.
• Corporate governance: both UK subsidiaries and branches will be expected to abide by the principles of good governance, and UK regulators are increasingly interested in the governance of global groups and in interaction between local UK entities (both subsidiaries and branches) and the international head office. However, there are also differences in regulatory expectations / approaches to branches and subsidiaries that need to be considered, the most significant being that subsidiaries are expected to have fuller local governance arrangements in place.

For further information as to how we can assist firms please refer to our brochure ‘Third country access: Helping international firms to service the UK market’.