As the UK seemingly stumbles towards its exit from the EU, questions are being raised about how this will impact the financial services industry and, more importantly, how it will affect the relationship between customer and adviser or product provider. What will the regulatory landscape look like after 29th March 2019? Will the new status quo lead to more disputes over contractual obligations and will this lead to greater workload for the Financial Services Ombudsman and the UK’s legal system?
The UK’s Financial Conduct Authority (“FCA”) has provided firms with some guidance on its expectations but, as the FCA is no nearer to knowing what will happen post Brexit than most of the firms it regulates, the guidance is couched in heavily caveated statements and is so generic that it is arguably not that useful to most financial services companies. The FCA has however made it abundantly clear that the “passporting” of services and offices as it is currently understood will cease at 23.00 on 29th March 2019 to be replaced with who knows what at this stage.
Under the EU Single Financial Services Market, many financial services are carried out under what are known as passports. This is an arrangement whereby a firm need not seek authorisation from the regulator in every EU or EEA host country in which it operates, but instead can operate under a passport issued by its home state regulator. Service passports cover situations where a firm does not maintain an office or staff in any country in which it does business. Branch passports cover situations where a firm maintains an office and staff in the host country.
Firms that are currently exercising passporting rights under one or more of the relevant EU directives will know that, unless there are transition arrangements in place, they will need to ensure that they comply with local requirements in the jurisdictions in which they operate and intend to operate. Current regulations apply broadly the same rules wherever services are provided in the EU although there has always been the requirement for firms to also comply with applicable local rules, known as the “general good” requirements.
It will be important for UK firms that rely on outward passports to do business in other EU or EEA countries, to consider whether they need to apply for regulation in the host state. As there is no intention for UK rules to deviate materially from EU rules at the point of Brexit, the key issue for passporting firms is not so much to comply with the rules but to ensure that they are able to offer those services in those jurisdictions in the first instance. Subject to any transition arrangements, local authorisation is likely to be required and failure to obtain this could set off a chain reaction of contractual breaches, customer detriment and claims against financial services firms.
The FCA has stated it will operate a transitional regime for inward passported firms known as the Temporary Permissions Regime (“TPR”). This will allow firms that register with the FCA under the TPR to continue to trade post Brexit on the proviso that the firms concerned then apply to FCA for authorisation within pre-determined “landing slots”. In order to utilise the TPR, inward passported firms must register with FCA between 7th January 2019 and 28th March 2019. The first “landing slots” are expected to be between October and December 2019 and the last to be between January and March 2021.
There is a risk that inward passported firms may not register with the FCA in time and then find that they must temporarily or permanently cease to conduct business in the UK. The alternative is to risk trading illegally. The window provided by the TPR does not provide very much time for inward passported firms to become familiar with FCA rules and requirements especially those that may exceed what is required by their home state regulator. There is scope for confusion, error and poor consumer outcomes. It is likely there will be significant scope for clients to make complaints and seek redress.
On the domestic front, the UK Government has plans to ensure that all directly applicable EU legislation is transposed into UK law through the EU Withdrawal Act. Not only will this convert existing EU legislation into UK law, but it will also retain existing UK laws that implement EU obligations. It is the Government’s intention that, as far as possible, the same rules and laws will apply after Brexit as before. This is fine for the short term but the danger is the lack of certainty over the medium and longer term implications when, inevitably, the UK regulatory system follows its own path.
Allowing for the fact that it is likely that the regulatory framework in the UK will seek to closely reflect that of the EU, there will still, perhaps inevitably, be areas where the rules deviate between domestic standards and international ones. This already happens of course between the EU and other jurisdictions such as the United States, Hong Kong and other major financial centres, but differences between the UK and its biggest financial services trading partner, the EU, could lead to greater challenges due to long term familiarity with the historical standards leaving firms with a false sense of security.
The potential implication of this dislocation of rules and regulatory standards is that firms will become more exposed to regulatory breaches unless they are fully aware of the different standards with which they must comply. If the standards with which firms are familiar change but firms do not change their practices, perhaps through ignorance or indifference, then not only will there potentially be technical rule breaches but there could also be implications for customers if business is not conducted correctly.
Clearly suitability of advice or discretionary decisions would be of concern, as would issues such as changes in execution arrangements, client order taking, claims processing and contractual terms. If firms fail to meet the required standards in their regulated business dealings then the prospect of disaffected customers increases and this is likely to lead to increased volumes of claims and complaints against firms.
Whilst complaints and claims are not always upheld, figures available for 2017, the last full year for which the FCA has published statistics, show approximately 4.4 million complaints in respect of non-PPI financial products and services. Figures indicate that approximately 40% or nearly 1.8 million of all complaints received by firms are rejected. Customers typically have the right to refer their complaint to the Financial Ombudsman Service (“FOS”) for further review and consideration, whether or not they are upheld by the original firm. The FOS, in its report for 2017/18, received 340,000 complaints of which 154,000 were for non-PPI financial products and services. Of these, just under 50,000 or 32% were upheld in the customer’s favour leaving over 100,000 cases that were rejected with legal action as the remaining course of action available to the customer.
There is therefore already a very large population of complaints and claims against firms that could be the subject of legal challenge and, if case numbers rise and the rejection rates both by firms and by the FOS are maintained at current levels, which data from the FCA and the FOS suggests has been the case in recent years, then the numbers of disaffected customers will rise concomitantly. Whether these cases ultimately end up in legal action is of course