Although the UK left the EU at midnight (11pm BST) on 31 January 2020, the terms of the withdrawal agreement between the UK and the EU provided for a transition period until midnight (11pm BST) on 31 December 2020 (Exit Day). In the absence of a deal, EU financial institutions will lose the right to passport their activities and services into the UK under the relevant EU single market directive after Exit Day. Nevertheless, the UK will remain very much open for business and EU financial institutions, along with their counterparts in other parts of the world, may be able to access the UK market without the need to be licensed in the UK on the basis of the overseas persons exclusion (OPE).
In addition, certain EU financial institutions may be able to benefit from the UK temporary permission regime for a period post-Exit Day. Please see our previous alert for further details.
This Alert provides a high level summary of the OPE.
Overseas persons exclusion
The General Prohibition
Section 19 of the Financial Services and Markets Act 2000 (FSMA) prohibits a person from carrying on (or purporting to carry on) any “regulated activity” in the UK (as defined in the FSMA (Regulated Activities) Order 2001) by way of business, unless that person is authorised or exempt, or an exclusion applies (the General Prohibition).
A breach of the General Prohibition may: (a) be a criminal offence punishable by imprisonment; (b) result in the imposition of a fine; and/or (c) render the agreement entered into in relation to the regulated activity with another party unenforceable.
The OPE provides an exclusion from the General Prohibition.
Application of the OPE to regulated activities
Broadly speaking, the OPE applies to the following regulated activities:
- dealing in investments as principal (e.g., own account dealing, including acting in a matched principal capacity);
- dealing in investments as agent;
- advising on investments;
- arranging deals in investments;
- operating a multilateral trading facility or organised trading facility;
- arranging regulated mortgage contracts (RMC), regulated home reversion plans (RHRP), regulated home purchase plans (RHPP), or regulated sale and rent back agreements (RSRB);
- entering into or administering an RMC, RHRP, RHPP or RSRB; and
- agreeing to carry on regulated activities
The OPE does not apply to deposit-taking, investment management, custody and most insurance based activities. However, depending on the specific facts, it may be possible to argue that the activities in question are not carried out in the UK based on the characteristic performance test. For example, the UK normally takes the view that deposit-taking is carried out where the account is based and investment management is carried out in the location in which the manager exercises discretion. In contrast, investment advice is deemed to take place where the advice is received. Therefore, an analysis of where the regulated activities are performed will be required in each case to determine whether the activity is carried on in the UK.
For completeness, reliance on the OPE is not necessary for activities that are not regulated in the UK such as certain commercial lending.