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UK post-Brexit risks – professional qualifications and capital adequacy – February 2021

UK post-Brexit risks – professional qualifications and capital adequacy – February 2021

Background

  • On 24 December 2020, the UK and EU announced that a free trade deal had been reached after many months of negotiations and delays
  • The “EU-UK Trade and Co-operation Agreement” (TCA) contains almost no clarity for any topics relevant to UK financial services
  • No clarity or solutions will be available until at least the end of March 2021 after the next set of negotiations is held between the UK and EU
  • This summary seeks to summarise some of the key points about what is known and what remains unknown; further changes are inevitable and needed

Regulatory Updates – a summary

Many regulatory changes impacting UK financial services activities started from 1 January 2021.  Some changes are immediate; others contain a short transition period.

All of these risks need to be analysed for their potential impact and then suitably mitigated.  Plan for the worst case and develop adequate contingency arrangements.  Strengthen all aspects of resilience for your business activities and related tasks.

Broad perspective for post-Brexit risk environment

With the loss of all passporting rights, all future business in the EU requires UK firms to negotiate rules and permissions in every EU state, individually or together if possible.

Under the terms of the TCA, the UK and the EU have committed to agreeing a Memorandum of Understanding relating to financial services regulation by March 31, 2021, establishing a framework for regulatory co-operation on financial services.  It also commits both parties to tackling international financial crime and tax evasion.

In his February 2021 Mansion House speech, the Bank of England governor Andrew Bailey said that, although the UK and EU are working towards a March deadline to agree an “equivalence” regime under which each would recognise the other’s regulations, “EU demands had so far been unreasonable”.

This comment follows the EU’s fears that the UK will adopt a low-regulation “Singapore-style” model that would undercut the EU.  The Bank’s governor stated that in his speech that, while some rules would change post-Brexit, sudden deregulation was not planned.

UK professional qualifications for UK individuals

  • From 1 January 2021, and until further clarification is provided by the EU, UK professional qualifications are no longer recognised in the EU. British qualifications are no longer accepted across Europe in accounting, tax, auditing and other areas so this will make it harder for British citizens to work in the EU.
  • This will affect a range of professions including lawyers, bankers, accountants and investment management so that those wishing to practice their trade in the EU after 31 December 2020 may need to requalify somewhere in the EU.
  • Rules on whether UK qualifications will be recognised and who is eligible to hold certain professional roles vary between EU member states; many member states, including Belgium and Luxembourg, allow only EU citizens to qualify.
  • For now, the TCA has created a framework that encourages further conversations on mutual recognition of professional qualifications so, to begin with, the UK government and UK qualification bodies can seek to strike deals with individual European governments and qualification bodies.
  • Even if professional qualifications are eventually approved on an individual country basis, general EU travel rules have changed too. Since 1 January 2021, Britons are limited to up to 90 days’ travel within a six-month period without a visa for any reason including work-related activities.
  • By contrast, EU citizens face few restrictions on moving to another state for work or leisure and can cross borders freely; UK citizens have now lost those rights to conduct work freely across the EU using professional qualifications.
  • Generally, delivering any service within the EU – such as auditing accounts or working as a lawyer as well as all other professions – will require a work visa and in many regulated sectors also being registered in that country as a local professional.
  • Visa policy is largely a matter for national EU governments, each of which has its own criteria for skills, language requirements and fees that vary depending on the needs of each country’s labour market.

Trade and transaction reporting

  • The UK’s transaction reporting regime (TPR) under MiFID II will change because of Brexit, including connected obligations such as submitting financial reference data.
  • This includes the need for trading venues to report for transactions on their venues by their EEA members, and EEA firms in the TPR who operate through a UK branch to start transaction reporting to the FCA.

Capital adequacy and prudential reporting

  • In December 2020, the FCA published its first of three detailed Consultation Papers about the planned new UK Investment Firm Prudential Regime (IFPR) for FCA prudentially-regulated investment firms.
  • The FCA currently plans to issue three consultations – two more during 2021 as well as its December 2020 consultation – before introducing the new UK prudential regime in January 2022.
  • Many UK firms have already started their internal regulatory change projects to prepare for the EU’s similar new prudential regime that no longer covers UK firms. That extensive internal project work for readiness must now be refocused.
  • Detailed requirements for new reporting will be announced gradually during 2021 and must be followed by all firms.

Timeline with relevant dates to be logged on regulatory calendar

  • The next set of EU-UK clarifications is expected by 31 March 2021

Next steps

All firms need to continue their detailed planning and research for all impacts on their business activities, employees, stakeholders and clients.

If anyone has specific questions or needs any advice, contact our specialists.