On 9 October 2020, the FCA and the Bank of England (BoE) published a joint letter sent to CEOs of UK and international banks on the importance of being prepared for the end of the transition period.
The headline messages in the letter are:
- As noted by the Financial Policy Committee (FPC) in its statement of 8 October 2020, most risks to UK financial stability that could arise from disruption to the provision of cross-border financial services, should the transition period end without the UK and EU agreeing equivalence or other arrangements for financial services, have been mitigated.
- Financial stability is not the same as market stability and some market volatility and disruption to financial services, particularly to EU-based clients, could arise.
- Financial institutions are continuing to make preparations and engaging with clients and customers to minimise any disruption and it is important that they continue to do so
Whilst the FCA and BoE acknowledge that preparations will vary between firms, and may differ between UK incorporated subsidiaries and branches of overseas firms it lists the following areas:
- Continuity of wholesale banking business and contracts. Where necessary firms should continue to take steps to facilitate the continuity of business and contracts. Firms should proactively engage with affected clients to complete repapering and on-boarding, and novate existing trades where necessary to ensure clients can manage risks related to lifecycle events. Firms are reminded of the FCA’s letter of 12 September 2018 and are asked to ensure that they have fully considered the impact on each client and whether the proposed changes, including any transfer of business if applicable, are in each of the client’s best interests. Where a firm intends to use national licensing and exemptions in EU Member States, it should ensure that it has everything in place by the end of the transition period to comply with the requirements in those Member States.
- In the absence of a decision by the European Commission on UK data protection adequacy, the use of standard contractual clauses (SCCs) in relevant contracts is one of the available ways that EEA firms can comply with the EU’s cross-border personal data transfer laws after the expiry of the transition period.
- Trading venues. Where a firm is currently subject to the share and/or derivatives trading obligation, it should consider how it will continue to meet its trading obligations in both the EU and UK under a range of scenarios at the end of the transition period, and the implications for its clients. The firm should discuss its plans and assumptions with the FCA, in particular if it plans to make any changes to its current systems and processes.
- The UK will retain access to Single European Payment Area (SEPA) schemes after the end of the transition period, subject to its continued compliance with the established participation criteria. Processing payments, including direct debits, through SEPA schemes after the transition period will require additional information to be included about the debtor in the payment instructions.
- Provision of retail banking services. The ability of UK banks to continue providing some services to customers – particularly retail customers – resident in the EU will be determined by national regimes. The scope and availability of national regimes is decided by individual EU member states. Depending on the national regime in place, the ability of UK banks to provide certain services to EU-based customers may be impaired. If the firm identifies customers who will be affected by a reduction or cessation in service provision, it should ensure that they are treated fairly and provide them sufficient notice to seek alternative arrangements in an orderly manner. Firms should also continue to take the necessary steps to manage any remaining operational risks.
In the final part of the letter, the FCA and the BoE remind EEA paasporting firms that upon their entry into the temporary permissions regime they will obtain temporary deemed permission to operate in the UK pending authorisation as third country branches.
The FCA is currently consulting on its approach to the authorisation and supervision of international firms in Consultation Paper 20/20 (which is relevant to firms from both EEA and non-EEA jurisdictions). This will supplement the FCA’s existing Approach to Authorisation and Approach to Supervision documents. For dual regulated firms, this will sit alongside the PRA’s Supervisory Statement for International Banks (SS1/18).