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 28 February 2019, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 (FSCR) statutory instrument (SI) was made law. The SI establishes 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 Explanatory Information 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 a Policy Statement outlining 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 processes in their planning.

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 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 be 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 firms fall within the SRO. This includes 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 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 person1
  • 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
1 Except in respect of FSCS protection for insurance policies issued prior to Brexit.

Regulatory requirements for firms in SRO 

Firms in SRO will be deemed to 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
  • Certain FSCS rules

As with firms in TPR, the present definition of non-Directive insurer will be modified so that it does not capture insurers in SRO operating in the UK without a branch. In other words, those firms will not fall under the non-Directive insurer definition.

Information requirements

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, will be  required to provide a run off plan describing their plans to run-off their business before the mechanism expires. Furthermore, firms will be required to provide annual updates on progress and any unexpected divergence from the plan. 

SM&CR and the SRO

The PRA has decided 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 ‘TPR SMF Application’ form containing key information on the individual(s) they propose to perform the SMF while they remain in SRO. The firm must also complete and submit the related Statement of Responsibilities form. After receiving an application the PRA (with the FCA’s consent) can decide to treat the relevant individual as approved. Individuals are not required to undergo the standard PRA fitness and propriety assessment to be eligible for deemed approval. Firms should ensure that they submit the relevant Senior Managers and Certification Regime forms within six weeks from exit day to enable individuals to obtain a deemed approval by 12 weeks from exit day.

A deemed approval can last for up to 12 months. The relevant individual will 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 apply to SMFs in business-as-usual firms will be disapplied. The SMF in these firms, however, will be responsible for ensuring the orderly run-off of the firm’s UK-regulated activities.

The Certification Regime will continue to apply 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.

Status disclosure to retail clients

Firms in SRO will 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.  However, the PRA is granting firms in SRO a three month transitional relief in respect of the requirement to use specific, bespoke wording for their status disclosures to retail customers.  During those three months of transitional relief firms will be able to use either the existing wording for EEA firms or the new prescribed wording.

Transitional relief for firms in SRO

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, the PRA will grant these firms transitional relief in relation to certain aspects of the following third country requirements as follows:

Duration of transitional relief Third country branch requirements
First performance year starting on or after the date falling 3 months after exit day

Remuneration rules where they go beyond CRD IV requirements:

  • Deferrals
  • Clawbacks
  • Buyouts
  • Risk adjustment
  • Personal Investment Strategies
3 months Status disclosure requirements to retail customers 
6 months Solvency II qualitative reporting – ORSA and RSR reports in respect of branch operations excluding information related to the branch SCR and branch MCR. 
15 months Bank branch level P&L reporting (No transitional relief to be provided for TC bank branches liquidity reporting and bank annual report and accounts)

Calculation of branch solvency and minimum capital requirements for insurance branches:

  • Branch SCR and branch MCR calculations
  • Localisation and deposit of branch assets representing the branch MCR or branch SCR
  • Branch scheme of operations that relate to the branch MCR and branch SCR, branch Technical Provisions or branch Own Funds
  • Branch technical provisions or branch own funds
  • Aspects of the Conditions Governing Business rules that relate to the branch MCR, branch SCR, branch Technical Provisions or branch Own Funds
  • Aspects of the Investments rules that relate to the branch MCR, branch SCR, branch Technical Provisions or branch Own Funds
Solvency II quantitative reporting
Solvency II qualitative reporting information which is related to the branch SCR and branch MCR
Composites rules relating to calculation of notional minimum capital requirement

FSCS and the FSCR

If the UK leaves the EU without an Implementation Period, FSCS protection will be provided as follows to customers of firms in FSCR:

FSCS members

Deposit-takers with an establishment in the UK, and insurers that are in the FSCR, will be members of the FSCS and are expected to comply with the respective Parts of the PRA Rulebook. No transitional relief is available. 

Deposits

SS18/15 ‘Depositor and dormant account protection’ has been updated and describes the PRA’s expectations.

Deposit-takers in the SRO

Depositors with eligible deposits held by UK establishments of firms with Part 4A permission to accept deposits (or deemed Part 4A permission, in the case of SRO firms) will be protected by the FSCS.

Update 13 September 2019: We published a new waiver by consent to waive the Continuity of Access requirements contained in the Depositor Protection Part of the PRA Rulebook. More information is available on the EU withdrawal – Temporary permissions regime page.

Deposit-takers in the CRO

Deposits held outside of UK establishments (which may include deposits held by CRO firms) will not be protected by the FSCS. 

Insurance

Insurance Policies issued before exit day

Existing FSCS protection for insurance policies issued prior to exit day will be maintained as long as the insurer remains a ‘relevant person’ under FSMA. The term ‘relevant person’ includes a person that was 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 are authorised persons for this purpose and will also be required to pay FSCS levies.

Insurance Policies issued after exit day

The FSCR provides limited permissions for firms to perform existing contracts and does not allow a firm to carry out regulated activities in relation to new contracts, except where necessary to service pre-existing contracts.  If policies are issued after exit day by SRO insurers with a UK establishment, FSCS 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 a UK establishment, FSCS protection would only be available in respect of risks situated in the UK. 

Insurers no longer in the FSCR

There are a number of reasons why insurers could 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 will not be available. Existing FSCS protection would continue to be available for claims in relation to acts or omissions that arose before the loss of status.

FCA activities

The FCA is responsible for rules relating to FSCS protection for the following activities: investment provision, investment intermediation, insurance intermediation, debt management and home finance intermediation.  For more information about the FCA’s approach for FSCS cover for firms in the FSCR, please refer to the FCA Consultation Paper CP18/29: ‘Temporary permissions regime for inbound firms and funds’.

This page was last updated 04 November 2019
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