Last updated 11:00, 20 July 2021

On 31 December 2020, the Brexit transition period came to an end and the UK left the EU (“Exit”). Exit affected a number of UK financial services firms, in particular firms that previously used to passport their services. On 1 July 2021 the UK confirmed it had failed to sign an agreement for mutual recognition of financial services rules with the EU.

Before this, on 26 March 2021, the UK and the EU had agreed a Memorandum of Understanding (“MoU”) on financial services, which provides the basis for 'voluntary regulatory cooperation' between the UK and the EU. This includes the creation of a Joint EU-UK Financial Regulatory Forum between the European Commission and the UK government. However, the MoU only provides for non-legally binding cooperation and, crucially, it does not address the fundamental issue of single market access for UK financial services firms.

  1. Which firms will Brexit affect?

The firms most likely to be affected by Brexit are:

  • firms and funds based in the UK that conduct business in the European Economic Area (“EEA”); and
  • firms and funds based in the EEA that carry out certain types of business in the UK.

Other firms and funds based in the UK may be also affected to a greater or lesser extent depending upon their regulatory status and the regulated activities that they carry on. In particular, Exit will have affected outsourcing or delegating arrangements with EEA firms.

  1. Has any of the main UK financial services legislation changed?

On Exit, the European Union (Withdrawal) Act 2018 converted most EU law that had direct effect in the UK (or UK law that implements EU obligations) into UK law. The UK government's intention is that, as far as possible, the same laws and rules that applied prior to Exit still apply, but with the necessary amendments to reflect the UK being outside of the EU. The FCA is using a Temporary Transitional Power that it has been granted by the UK government to “onshore” regulation that is changing to reflect the UK being outside of the EU. Firms should ensure they comply with any “onshored regulation” by 31 March 2022.Certain regulatory requirements changed immediately upon Exit, including the reporting obligations under MiFID and EMIR, certain Client Assets Specialist Sourcebook (CASS) rules, certain rules relating to payment services and e-commerce providers, and rules relating to mortgages secured on property in the EEA.   The FCA has indicated that it does not intend to take enforcement action against regulated firms that were not meeting these requirements immediately upon Exit provided such firms are able to produce evidence that they took reasonable steps to prepare to meet the new requirements by Exit. The UK Treasury is also currently consulting on the future of financial services regulation, including moving substantial parts of the EU financial services regulation that was converted into UK statute on Exit into the regulators' rulebooks. Further, the Treasury is proposing to move the UK towards “activity-based regulation”, which would represent a large change in the UK's approach to financial services regulation.

  1. Has the passporting regime ended?

Yes. Passporting between the UK and EEA states ended on Exit.

  1. What is replacing passporting?

With no “equivalence decisions” being agreed by the EU and UK on market access, firms that used to passport from the UK into the EEA will need to consider the domestic laws of the country that the firm is passporting into. The UK has established a Temporary Permissions Regime (“TPR”) which replaced passporting for EEA firms. The TPR allows EEA firms to continue to operate in the UK for three years after Exit. Firms can only use the TPR if they notified the FCA prior to Exit and if they meet the following criteria:

  • firms that had passports under Schedule 3 to FSMA in place immediately before Exit, including where they had top-up permissions;
  • Treaty firms under Schedule 4 to FSMA that qualified for authorisation before Exit, including where they had top-up permissions; and
  • electronic money institutions, payment institutions and registered account information service providers who were exercising their passporting rights under the Electronic Money Directive or the Payment Services Directive immediately before Exit.

Firms will be subject to the same obligations and supervisory framework as firms authorised under Part 4A of the Financial Services and Markets Act 2000 (“FSMA”). Firms that, immediately before Exit, passported with a top-up permission obtained a deemed variation of that permission, which means that these firms will continue to be authorised.Firms that wish to continue carrying on business in the UK permanently will need to apply for full FCA authorisation or a variation of permissions before the end of the TPR.

  1. What about firms that do not wish to continue to provide services in the UK?

Firms that previously passported from the EEA to the UK immediately prior to Exit but that do not wish to continue to carry on regulated activities in the UK will enter the Financial Services Contracts Regime (“FSCR”) in order to wind down their UK business. The FSCR is limited (subject to any extensions) to 15 years for insurance contracts and 5 years for all other contracts. The FSCR provides two mechanisms:

  • Supervised run-off (“SRO”): for EEA firms with UK branches or top-up permissions in the UK that either did not enter the TPR or entered the TPR but do not secure UK authorisation at the end of the TPR.
  • Contractual run-off (“CRO”): for EEA firms with no UK branch.

Firms in the FSCR will have to maintain authorisation in their “home” state and must notify the FCA if that authorisation is cancelled or varied. Firms will also be limited to only performing regulated activities that are necessary for the purposes of their pre-existing contracts (and so cannot carry on any new UK business).Firms in CRO will need to notify every party to pre-existing contracts that the firm is now exempt and is not regulated by the FCA or the PRA. This notification must include details of any material change in the protection of client assets, what dispute resolution mechanism applies, and information about the relevant compensation scheme.

  1. What steps should you be taking?
  • For any requirements that have changed on Exit, ensure you are complying with the new rules and be able to produce evidence of the steps taken should this be requested by the FCA.
  • Continue to monitor how Exit affects your firm and your clients, including reviewing any outsourcing arrangements that have been affected.
  • In respect of any “onshored regulation” that will affect your business, plan the implementation of changes that will be required by 31 March 2022.
  • Make any necessary notifications to the FCA or other regulators.
  • Discuss any implications with your “home” state regulator.
  • Make sure that existing safeguards and protections for client assets remain effective.
  • Seek legal advice where you require assistance.
  1. How we can help?

Our Financial Services Regulation team has experience advising our financial services clients on how to respond to Exit, including advising firms based in the EEA on continuing to service their UK clients. We can assist firms by:

  • advising on how to respond to Exit and how the transitional measures apply to them;
  • advising on how to structure their businesses so that they can continue to offer services to all of their clients, whether in the UK or in the EU after Exit;
  • assisting firms in preparing the necessary notifications;
  • advising on and drafting applications for FCA authorisation;
  • advising on compliance with obligations under the transitional arrangements;
  • advising on customer communications explaining the effects of Exit; and
  • advising on and drafting client agreements and other key contracts to reflect the changes on Exit.

We also work closely with other specialists across the firm in order to assist with other challenges that firms may face, such as data protection, tax and competition law issues.

Head to our Brexit Exchange where you will find all the latest updates and developments from our experts, regarding Brexit and how that affects businesses and individuals in a range of areas.


The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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