Brexit Insight: Regulatory issues for people

Only 4 weeks into the post-Brexit world, it is clear that UK and EU regulators are closely scrutinising the way in which UK firms are continuing to do business into the EU. There has been a flurry of regulatory statements in the lead up and first few weeks of 2021. The FCA made a statement on Christmas Eve informing UK firms of their responsibilities when conducting business into the EU going forward, including stressing the fact of adherence to local national regimes and having to keep an eye on any changes down the line. In addition, the German and other EU regulators have publicly have been telling UK firms that they will take action if UK firms breach the local licensing regimes. Most recently ESMA issued a public letter stating that the practice of reverse enquiry should not be abused by UK firms. We may have left the Union with a TCA but there is definitively a sense of regulatory hostility in the air.

As part of Brexit planning, many firms have restructured their presence in the UK and EU.  As the dust settles on the UK's new relationship with the EU and these working arrangements become business-as-usual, Senior Managers should consider whether they need to take additional steps to monitor individuals depending on the particular working arrangements.

Providing services to customers in the EU

We have set out below some common scenarios that cover the activities which individuals may be performing and which Senior Managers will need to monitor carefully, together with some practical guidance as to how individuals can comply:

Individual in the UK and working for EU regulated entity: If an individual is continuing to perform regulated activities from a UK regulated entity to EU clients on the basis of a cross-border licence, tolerated market practice or exemption, or because the activity is not regulated in a particular jurisdiction, then their activities will still be subject to SMCR because they are performing their role for the UK-regulated entity.

The FCA have been clear that "...the extent to which UK firms can continue to provide services to customers in the EEA will be dependent on local law and local regulators' expectations. The FCA expects UK firms to take the steps available to them to ensure they act consistently with these local laws and expectations. The FCA is clear that firms' decisions need to be guided by obtaining appropriate outcomes for their customers, wherever they are based." 

Therefore, Senior Managers need to make sure that there are appropriate controls in relation to these staff in the context of their current activities, in particular making sure that controls are in place to ensure staff are performing any EU-related activities within permitted parameters.   This is new post Brexit and something that is likely to be scrutinised by the FCA. Senior Managers will, therefore, need to ensure that they can demonstrate their rigorous oversight of these new arrangements. Whilst firms should have processes in place, individuals will need to be carefully monitored to ensure compliance with the firm's processes and deals considered on a jurisdiction-by-jurisdiction basis.  The position on cross border business is also changing and EU regulators are publishing their views both formally and informally on a regular basis: these will need to be carefully monitored and reported to Senior Managers to enable the firm to take measures to manage their staff who are continuing with any business.

Individual is "dual hatted" - working for the UK regulated firm and (new) EU regulated firm: If an individual is "dual-hatted" and partly performing work for a UK-regulated entity and partly for an EU regulated entity, there will need to be additional systems and controls in place and the relevant Senior Manager will need to impose clear parameters around the practical working arrangements of the individual.  Subject to the position in the pandemic, some individuals will be regular commuters between the UK and the other jurisdictions, in particular, short-term business visitors or intra-company transferees ("ICT"s). Care will need to be taken as to what is and is not permitted business visitor activity and what the requirements are for an ICT visa, as these are likely to vary across EU member states. For more information on the immigration issues to be aware of post-Brexit please see our Insight. In practical terms, implementing this will involve robust contractual arrangements with the individuals to address their new contractual situation. However, what is likely to involve more oversight will be the additional monitoring and other practical steps (such as different business cards and email signatures, being clear which entity they are representing in meetings, etc.) which will be necessary to ensure that the contractual arrangements are reflected in practice.  Firms (and senior managers) will need to be clear on the expectations of UK and EU regulators in relation to how such arrangements should work in practice, and keep this under review.  In addition, individuals may have a reporting line into a UK Senior Manager for their UK regulated business and a reporting line into an EU manager for business conducted from the EU regulated entity, which will need to be practically managed. Conduct relating to business from the EU regulated entity may be relevant for the UK SMCR regime so will need to be made available to the UK Senior Manager.

Individual working from (new) EU regulated entity: If a firm has established a new EU entity and the individual is now based in the EU and working for that EU regulated entity, it will be subject to the regulations of the relevant EU country in the normal way. If an individual is seconded full-time to an EU entity (and not dual-hatted), their activities for the EU entity will not to be subject to the UK regulatory regime for the first time but firms will want to consider the extent to which firm policies should continue to apply to individuals who are working for EU entities at this time.

Individual working from the EU for the UK regulated entity: Finally, some individuals may be living in the EU whilst working for a UK entity, perhaps due to historic passporting arrangements or COVID-19 that have now fallen away or for personal/family reasons.  Whilst these arrangements can be attractive for employees, particularly whilst many are working remotely due to Covid, they can have complicated tax and permanent establishment implications for a UK entity. Firms will need to consider these implications and whether the arrangement is feasible from a risk and cost perspective.

Additional detail

Senior Manager obligations

Under SMCR, Senior Managers have a "duty of responsibility", which the FCA and PRA have the power to enforce directly against individuals.  If a firm has breached its regulatory requirements, the FCA and PRA can take action against a Senior Manager responsible for management of the relevant activities if they did not take reasonable steps to avoid the breach.  The regulators would take a number of factors into account when considering the steps taken, including the Senior Manager's understanding of the firm's activities, any delegation of responsibilities (and oversight of such delegation) and systems and controls.  To be able to defend their actions in case of potential enforcements, Senior Managers should have evidence of the steps taken to manage their activities.  This duty is bolstered by the Senior Manager Conduct Rules, which require Senior Managers to take reasonable steps to ensure, amongst other things, that they oversee the discharge of any delegated responsibilities effectively.  Senior Managers should consider whether they need to take additional steps to manage their teams where SMCR continues to apply to new arrangements. 

EU View

The FCA has made it clear that post-Brexit UK firms can only do business into the EU if permitted under the local national regimes and local regulatory tolerances. In addition, UK firms must keep an eye to local changes. EU regulators are scrutinising the way in which UK firms can continue to do business in the EU. To assist firms, we have developed EU View, a service which provides UK firms with clear guidance on how to do business into the EU. It is maintained and updated throughout 2021 to assist to provide an internal risk control framework. This service supports the relevant SMCR functions.

This insight is part of our series of short  briefings tackling the people issues (including immigration, tax and employment law) arising as a result of the UK's departure from the EU. Please let us know if there is a particular topic that you'd like us to cover.

To read other articles in our series of client insights on Brexit - People issues, please see useful articles on our Brexit Feature page.