Financial Services Contracts Regime

The Financial Services Contracts Regime will ensure that those EEA firms that do not enter the temporary permissions regime (TPR), and those that exit the TPR without UK authorisation, are able to wind down their UK regulated activities in an orderly manner.

Introduction

On 17 December 2018 the Government published a draft of the statutory instrument, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, that will establish, subject to parliamentary approval, a Financial Services Contracts Regime to ensure that those EEA firms that do not enter the temporary permissions regime (TPR), and those that exit the TPR without UK authorisation, are able to wind down their UK regulated activities in an orderly manner.

Further details of the Financial Services Contracts Regime can be found in HM Treasury’s Policy Note.  

The Bank of England’s expectation is that the FSCR will function as a back-stop to the TPR to mitigate contract continuity risks. The regime provides limited permissions for firms to perform existing contracts but, unlike the TPR, does not allow a firm to carry out regulated activities in relation to new contracts, except where necessary to service pre-existing contracts. Firms falling within the scope of the regime will be expected to run-off, close out, or transfer obligations arising from contracts that exceed the time limit of the regime (15 years for insurance contracts and 5 years for other contracts) prior to the end of the regime.

The PRA has now published joint Bank/PRA Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ containing proposals on the changes to the PRA Rulebook required to operationalise the Financial Services Contracts Regime, and the Bank’s broader approach to Financial Services Compensation Scheme (FSCS) protection.

Firms are encouraged to engage with the Bank and PRA on their authorisation and recognition processes in their planning, including how to make best use of the additional time provided by the implementation period.

Overview of the Financial Services Contracts Regime

The purpose of the FSCR is to be a back-stop to the Temporary Permissions Regime (TPR) and to allow for the orderly wind down of the UK regulated activities of firms that:

  • were passporting prior to exit day and require authorisation in the UK to continue servicing their contracts;
  • did not enter TPR or exited TPR without UK authorisation in relation to some or all of the regulated activities which they carry on; and
  • have home state authorisation. 

The FSCR is premised on a ‘no deal’ scenario.

The FSCR comprises two regimes: Contractual Run-Off (CRO) and the Supervised Run-Off (SRO).

Contractual Run-off (CRO)

CRO applies to firms without a UK branch (which operate under a freedom of services (FoS) passport immediately before exit day) which do not hold a top-up permission and do not enter TPR. These firms enter CRO automatically.

CRO will work based on a limited exemption to the general prohibition for the purposes of winding down firms’ UK regulated activities in an orderly manner.  
A necessary condition of entry into the CRO is that a firm is authorised by its home state regulator.

Firms in CRO are principally permitted to carry out regulated activities which are necessary to perform pre-existing contracts. However, firms in CRO may also be permitted to carry on regulated activities which are necessary to:

  • reduce the financial risk of parties to pre-existing contracts and third parties affected by the performance of pre-existing contracts;
  • transfer the property, rights or liabilities under a pre-existing contract; and
  • comply with legal and regulatory requirements

Supervised Run-Off (SRO)

Multiple categories of firm fall within the SRO. These include firms:

  • with a UK branch (operating under a freedom of establishment (FoE) passport immediately before exit day) that did not enter the TPR;
  • that entered the TPR but exited it without a UK authorisation in respect of all regulated activities which they carry on (operating under an FoE or freedom of services (FoS) passport immediately before exit day); and
  • that held top-up permissions before the UK’s exit from the EU and were operating under an FoE or FoS passport immediately before exit day

These categories of firm enter the SRO automatically.

Firms in SRO are principally permitted to carry out regulated activities which are necessary to perform pre-existing contracts.  Certain firms in the SRO will also be permitted to carry on regulated activities which are necessary:

  • to reduce the financial risk of parties to pre-existing contracts and third parties affected by the performance of pre-existing contracts;
  • to transfer the property, rights or liabilities under a pre-existing contract; and
  • to comply with legal and regulatory requirements

The high level features of these two regimes are summarised in the table below:

Feature

Supervised Run-Off (SRO)

Contractual Run-off (CRO)

Eligibility

  • FOE firms and FOS firms (with top-up permission) which do not enter into TPR
  • All FOE firms and FOS firms which exit TPR without authorisation in relation to all of the regulated activities which they carry out.
  • FOS firms (without top-up permission) that do not enter TPR.

 

Authorisation

  • ‘Deemed’ Part 4A authorisation;
  • PRA authorised person
  • Supervised by UK authorities
  • Not a PRA authorised person
  • Not supervised by UK authorities, however home state authorisation is a condition of entry into the CRO.

Permissions

  • Permissions are limited to those necessary to service existing contracts in run-off and to carry out certain limited ancillary activities.

 

  • Permissions are limited to those necessary to service existing contracts in run-off and to carry out certain limited ancillary activities

Duration

  • 5 years, with an exception for insurance contracts which will have a time limit of 15 years

Regulatory requirements for firms in SRO 

Firms in SRO will be UK authorised firms.  We will have the same powers in relation to firms in SRO as with other firms with a Part 4A permission.

Firms in SRO with an establishment in the UK will be required to comply with the same rules that apply to other third country branches. These are available to view in the PRA Rulebook.

For firms in SRO without a branch in the UK (cross border service providers) a more limited set of rules will apply. These include:

  • Rules that would apply to a PRA authorised firm without a UK branch (including the Fundamental Rules, Auditors, Change in Control, Close Links, Fees, General Provisions, Information Gathering, Interpretation, Notification and Use of Skilled Persons Parts)
  • The Senior Manager and Certification requirements that apply to third country branches  (subject to amendments proposed in Winter CP)
  • Certain FSCS rules (subject to amendments proposed in winter CP)
As with firms in TPR, the present definition of non-Directive insurer would capture insurers in SRO operating in the UK without a branch. The PRA is proposing in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ to amend this definition so that it does not capture SRO firms. In other words, those firms would not fall under the non-Directive insurer definition. 

SM&CR and the SRO

The PRA has proposed in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ to apply a streamlined version of SM&CR to firms in SRO whereby they will be required to have at least one individual approved to perform the Head of Overseas Branch (Senior Management Function (SMF) 19) function in the Senior Management Functions 7/ Insurance – Senior Management Functions 6 Parts of the PRA Rulebook (‘Provisional SMF19’).

The statutory instrument establishing SRO allows the PRA and the FCA to treat individuals as if they were approved to perform an SMF while their firms are in the SRO, if those firms have submitted an application under section 60 of FSMA on their behalf (‘Section 60 applications’).

Irrespective of whether a firm enters SRO directly or via TPR, a firm will need to complete and submit a short form application form(s) (similar to the form under TPR) containing key information on the individual(s) they propose to perform the SMF while they remain in SRO. This application will be based on the current Short Form A. After receiving an application the PRA (with the FCA’s consent) can decide to treat the relevant individual as approved.  Individuals will not be required to undergo the standard PRA fitness and propriety assessment to be eligible for deemed approval. The PRA has proposed in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ to provide firms in SRO with a period of up to 12 weeks from entry into SRO in which to obtain deemed (or full) approval for individuals who require it.

A deemed approval can last for up to 12 months. The relevant individual would need to undergo a full fit and proper assessment and obtain full PRA approval (with FCA consent) as an SMF within 12 months of the firm’s date of entry into SRO irrespective of whether it enters it directly or via the TPR.

The fit and proper assessment and the responsibilities of the SMFs of firms in SRO will be tailored to reflect the narrower objectives of run-off. In particular, the Prescribed Responsibilities that would apply to SMFs in business-as-usual firms would be disapplied and replaced with a bespoke, single responsibility to “manage the orderly run-off of the firm’s UK-regulated activities.

The Certification Regime would continue applying to the extent that it currently does pursuant to FCA rules i.e. to firms currently operating in the UK as a branch via an establishment passport but not to any other firms.

Information requirements

The PRA has proposed in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ that firms in SRO (both banking firms operating under FoE and FoS passports as well as insurers operating under FoE and FoS passports), upon entry into SRO, provide a run off plan describing their plans to run-off its business before the mechanism expires. Furthermore, firms will be asked to provide annual updates on progress and any unexpected divergence from the plan.

Status disclosure to retail clients

The PRA has proposed in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ that firms in SRO be required to include specific status disclosure wording in their communications with retail clients, both written and electronic, to indicate that they are in the regime.

Possible transitional relief for firms in FSCR

Firms entering SRO may find it challenging to comply immediately after exit day with some requirements in our rules that will apply to them for the first time. As a consequence, we are considering (as noted in Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’) possible transitional relief  in relation to certain aspects of following third country requirements:

  • Branch Solvency and Minimum Capital Requirements for insurance branches (but we would  expect firms to comply with  branch security deposit requirements)
  • PRA remuneration rules where they go beyond minimum CRD IV requirements
  • certain reporting obligations where they involve the segregation of branch data and the reporting and review of this data where this is not already required and
  • certain composite rules for insurance branches.
We will publish further information on possible transitional relief for firms in SRO in due course.

FSCS and the FSCR

The PRA has made proposals on FSCS protection in chapter 6 of Consultation Paper 32/18 ‘UK withdrawal from the EU: Further changes to – PRA Rulebook and Binding Technical Standards – Resolution Binding Technical Standards’ which should be considered alongside the proposals in CP26/18, which they add to and amend. It is important to note that if an Implementation Period is agreed with the EU the existing FSCS protection will continue as it is today and the proposals in CP32/18 will not take effect.

The PRA is proposing to:

  • establish the future scope of protection for depositors and policyholders of firms in the SRO and CRO;
  • adjust the Management Expenses Levy Limit and Base Costs Part of the PRA rulebook to include CRO insurers.

The proposals would apply immediately upon exit.

FSCS members

Deposit-takers with an establishment in the UK and insurers that are in the FSCR would be members of the FSCS and will be expected to comply with the respective Parts of the PRA Rulebook.
 

Deposit-takers in the SRO

Firms with UK establishments within the SRO will have deemed Part 4A permissions to accept deposits and the PRA proposes that their depositors will be treated the same as firms in the TPR.
 

Deposit-takers in the CRO

Firms which do not have UK establishments would not be members of the FSCS. The PRA expects that home state deposit guarantee schemes would continue to protect deposits held by these firms.
 

Insurance Policies issued before exit day

The PRA proposes to maintain existing FSCS protection for policies issued prior to exit day such that existing FSCS protected policies maintain protection until the risks are run off as long as the insurer remains a ‘relevant person’ under FSMA. A firm is an ‘relevant person’ if it is an ‘authorised person’ under FSMA at the time of the act or omission giving rise to the claim. EEA firms in the SRO and CRO would be required to pay FSCS levies.
 

Insurance Policies issued after exit day

If policies are issued after exit day by SRO insurers with a UK establishment, the PRA proposes that protection would apply as it does for policyholders of insurers in the TPR, where policies in respect of risks  situated in the UK, Channel Islands, Isle of Man (or Gibraltar) would be eligible for protection.
If there are policies issued after exit day by SRO or CRO insurers without an establishment FSCS protection would protect policies only in respect of risks situated in the UK.
 

Firms no longer in the FSCR

There are a number of reasons why firms will cease to be a relevant person. If a firm is no longer a ‘relevant person’ at the time the act or omission that give rise to the claim occurs (or the policies have not been transferred to a ‘relevant person’, FSCS protection would be lost. Existing FSCS protection would continue to be available for claims in relation to acts or omissions that arose before the loss of status.
 
This page was last updated 20 December 2018
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