Speech by Sarah Rapson, Director, Authorisations at the Association of Professional Compliance Consultants (APCC) Autumn Conference.
Speaker: Sarah Rapson, Director, Authorisations
Event: APCC Annual Conference
Delivered: 2 October 2018
Note: this is the speech as drafted and may differ from the delivered version
Highlights
- We are preparing for all Brexit scenarios, including the possibility of ‘no-deal’
- We are consulting on a temporary permission regime to mitigate cliff-edge risks faced by EEA firms passporting into the UK
- Alongside Brexit preparation, we are continuing to improve our approach to authorisations by instilling a service mind-set
It’s hard to believe that it’s barely six months since I spoke at your Annual Conference[2]. A lot has happened since then so I really appreciate this opportunity to update you. My main topic today is something that is on just about everybody’s mind at the moment, not least the politicians gathered in Birmingham this week, which is Brexit. In a few minutes, I’ll give you an overview of what the FCA has been doing to prepare for Brexit – in whatever form it may take. And I will outline what regulated firms will need to do to be as ready as possible to carry on business after 29 March next year.
But I want to stress that while getting ready for Brexit is a major piece of work for the FCA, and for Authorisations, we have not let it distract us from meeting the other commitments we have made to improve our approach. That is, to provide more support to firms to meet our minimum standards and to be more transparent about our performance.
Delivering Effective Authorisations
I’ve spoken before about the Delivering Effective Authorisations change programme that I kicked off a little over a year ago. You’ll recall that some of the work programmes are internally focused, in terms of what we do and how we do it. Some of the work is targeted towards firms: ensuring firms meet minimum standards and improving the firm experience. And finally, some of the work is aimed at consumers; reducing harm to consumers and creating better engagement. This is how we add public value in Authorisations at the FCA.
I’m not going to give you chapter and verse on everything that has been done so far, but let me highlight a few examples that I think might be of particular interest.
The first is in how we measure and report our own performance[3]. In other words, how transparent we are. The eagled-eyed of you might have noticed the way in which we report our KPIs has changed quite significantly. For example, we now report on minimum, maximum, mean average, modal and median average processing times across all our authorisation processes. And we also now show how many of the applications that should have been concluded each quarter actually were concluded within service standard.
Behind that is a recognition that even though we are operating in a control environment – in other words, there’s no latitude for lowering standards – we must also provide a good service to firms. On a practical level, that can be as simple as ensuring that a change of case officer is handled efficiently and communicated properly to firms.
And, of course, if you can measure it, you can improve it. By measuring our performance more closely we have been able to identify where the process can become stuck and tackle it.
At the same time, we have begun to take a harder line on submissions that border on the vexatious. We will move to refuse firms earlier on in the authorisation process where the firm is not ‘ready, willing and organised’ to operate in the regulated Financial Services market. We have just published an explanation of what we mean by that[4] on our website.
The result is that we have been able to reduce the average time to authorisation by 35%. This, coupled with the service mindset initiative, has led to overall satisfaction in the process increase from 21% to 66%.
That’s not good enough, of course, but I hope you will agree that it is a positive trend.
Finally, let me mention some improvements that are still in the testing stage but that I am confident will benefit both firms and consumers alike.
This summer we began making a number of changes to the Register[5] with the aim of making it easier to use and understand.
Changes made in July included making clearer when requirements, including suspensions, apply to an entry and also some improvements to the search facility.
This month we introduced a new facility under the title ‘find a financial adviser near me’ to make available a simpler presentation of some commonly searched information. We have this operating in beta mode at the moment.
There’s still some work to be done to make some of the regulatory language more customer-friendly but please do have a look at it and let us have your feedback.
We have also been consulting on proposals to introduce the Directory – a new public register for checking the details of a wider group of individuals working in financial services. This would build on the functionality of the Register.
Among other things, it is intended to better support customers in being able to verify the identity of those selling or providing advice on financial products to help protect themselves from scams.
There is more to come from the Delivering Effective Authorisations programme, so watch this space as they say.
But I wanted to mention it because the service mind-set, that I am instilling within the existing Authorisations processes, has been key to the approach that we are taking in our own planning, and the advice and support that we offer to regulated firms to help them prepare for Brexit.
Brexit and preparing for day one
Our starting assumption is that there will be a transition or implementation period from March 2019 until the end of December 2020. This was something we had called for and at the end of last year we welcomed confirmation that it would happen. It will give everyone more time to prepare and lower the execution risks associated with a disorderly exit.
However, the implementation period is of course part of the overall negotiations between the UK and the EU and not yet a certainty, therefore we must prepare for all scenarios, including the possibility of a ‘no-deal’ or ‘hard’ Brexit at the end of March next year.
And that is what we have been doing. Across the FCA, together with colleagues from the Bank of England and the Government, we have been working to develop a number of safeguards and contingencies, in the event of a hard Brexit, to ensure that ‘Day 1’ works smoothly.
So, what will happen on 30 March 2019? To explain that, I’m afraid I must start with the legal and regulatory framework.
The key piece of legislation is the EU Withdrawal Act. I’m sure you have all read it from cover to cover, but for our purposes today, let me remind you of the important points.
If there is no implementation period, after 29 March, when EU law ceases to have effect in the UK, existing EU legislation will be converted into UK law and UK laws which implement EU obligations will be preserved.
The aim is that, as far as possible, to ensure continuity and certainty, the same rules and laws will apply after exit day as they did the day before.
In addition, the Withdrawal Act also gives the Government the power to amend retained legislation, via Statutory Instrument, to ensure it functions effectively post-Brexit.
Accordingly, we have been working closely with colleagues from the Treasury and the Bank of England to identify the various aspects of the retained legislation that may need amending. And we are now starting to see the Government lay these statutory instruments before Parliament.
These changes in legislation will also mean changes to our Handbook. We have been undertaking a painstaking line-by-line review of around 50 pieces of EU financial services legislation, and 185 Binding Technical Standards.
Thank you. I can feel your sympathy - but seriously, this work will ensure our Handbook and associated rules are fully operational at the point of exit. We will be consulting on these changes very shortly.
Between now and March 2019, we will also try to limit any other Handbook changes to those that are in line with our Business Plan, or otherwise essential.
Temporary permissions regime
So, that’s the legal and regulatory framework. Let me now turn to practical matters, by which I mean the temporary permissions regime[6], and the decisions that your clients will need to be making over the next few months and how you can help them.
We are very aware of the cliff-edge risks faced by EEA firms passporting into the UK, and their UK customers, should there be an abrupt loss of the passporting regime in the event of a hard Brexit.
As at April this year, more than 8,500 financial services firms were registered as passporting into the UK. While we do not think that all these firms are using their passport, a significant number will be and we expect will need to seek authorisation in the UK in order to continue to access the UK market after Brexit.
The temporary permissions regime is a key mitigant for this risk and we in Authorisations have been leading this work for the FCA.
Our aim is that this regime will allow EEA firms that passport into the UK immediately prior to exit day, to continue operating in the UK for a temporary period while seeking full UK authorisation.
Firms will be able to enter into new business and fulfil existing contracts within the scope of their passport. In a similar vein, investment funds with a passport to market in the UK will be able to continue temporarily to market in the UK while seeking UK recognition.
Notification and landing slots
So, how will it work? Let me take you through it step by step.
Firms will need to notify us that they want a temporary permission. Fund managers will also need to notify us of which of their stock of passported funds they wish to continue to market in the UK temporarily. Both will notify us via a simple process, using our Connect system.
If the regime is required, we will open the notification window in early 2019 and it will close just prior to exit day. We will communicate widely when the notification window opens but it is important for me to stress that firms and fund managers must notify us in good time. This is crucial and I cannot stress it strongly enough. The legislation does not permit us to accept latecomers. Once the window closes, it is closed for good.
Once in the regime, firms and fund managers will be given a ‘landing slot’ to submit their application for UK authorisation or recognition. We hope to allocate the landing slots quickly once the regime is operational with the first of these starting later in 2019. This will allow those in the first slot plenty of time to prepare their applications. We expect the regime will operate for three years with the last landing slot in early 2021.
Firms’ status - the detail
In terms of a firm’s status, once in the regime, firms will be temporarily authorised to undertake the regulated activities covered by its passport in the UK as if it had sought and obtained authorisation under Part 4A of FSMA. The firm will continue to be an authorised person for the purposes of UK law.
This means that our powers under FSMA will continue to apply to the firm but will also cover matters which were previously handled by the firm’s home state. For example, for business carried out in the UK, we will have responsibility for supervising the firm. We will also be able to impose requirements on firms, and our Handbook will apply to firms in the regime.
With regards to EEA UCITS (Undertakings for Collective Investments in Transferable Securities), each individual fund or sub-fund will be temporarily recognised to allow it to continue to be marketed to retail investors in the UK.
EEA AIFs (Alternative Investment Funds) will be able to be marketed in the UK for a temporary period on the same basis as they were before exit.
We have spent a great deal of time thinking about which rules should apply to firms and funds in the regime. We have tried to balance a number of factors, including: ensuring appropriate consumer protections continue; firms in the regime can comply with our requirements from exit day; and ensuring that we can effectively supervise firms during the temporary regime.
We are also mindful of the fact that the regime is, by definition, temporary and should offer a bridge to the full UK regime that will apply when leaving the regime.
We will consult on our proposals in detail in the very near future.
Throughout this work, with consumer protection at the front of our minds, we have engaged with the FCA Consumer Panel and other bodies to ascertain their concerns and respond to them accordingly. As part of the onshored legislation, we are seeking to maximise continuity for consumers to the extent that it is possible. The temporary permissions regime will work to remove any interruption of service to consumers of EEA firms.
Outbound firms
However, we are aware that our work on the temporary permissions regime does not necessarily resolve the challenge for all firms. UK-based firms that do business in only the UK may be affected less directly than others or not affected at all by the loss of passporting.
Conversely, UK-based firms, which carry out business between the UK and the EEA, may be affected. We have published some questions firms should be asking themselves[7] to help UK firms decide if they conduct business in the EEA, or if Brexit might affect their business.
While, these questions are not a full checklist, they do offer a place to start and a number of areas for firms to consider, some of which may be obvious, but others are perhaps less so.
Importantly, as there are currently no plans for reciprocal temporary permission arrangements from the EU, firms that are conducting business in the EEA should continue to prepare for a range of scenarios and discuss any arrangements and the implications of a transition period with the relevant EU regulators.
Conclusion
I suspect that by now everyone here appreciates that, for us all, the scale of the Brexit challenge is unprecedented. However, there are a number of areas where you can help us to help the firms you deal with daily.
First and foremost, it would be a great help to be able to quantify the scale of the challenge ahead in implementing the temporary permissions regime.
Earlier in the year we launched an online survey aimed at EEA firms and fund managers[8] passporting into the UK asking them to register the likelihood of their requiring temporary authorisation.
So far, we have had well over 400 responses to the survey, including from fund managers who have passports to manage nearly 3,500 funds in the UK.
But we do know that not all firms that want to avail of the regime have completed the survey yet and we encourage them to complete it as soon as possible.
We will also use this survey to communicate more detail on the temporary permissions regime as it becomes available.
And second, if you are dealing with firms that passport into the UK, can I ask you to encourage them to make sure their UK passport notification is up to date? We will be using these details as part of the notification process and this will be smoother if the details we hold are accurate.
The scale of the Brexit challenge is unprecedented but we believe that we can respond to it while continuing to meet the FCA's statutory objectives. From a regulatory perspective, we are working with the Government, the Bank of England and our counterparts across the world to secure just that.