Guidance

Annex: Run-off regime for EEA firms that currently passport into the UK under Financial Services and Markets Act 2000

Updated 7 August 2019

1. Background

The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 became law on 6th November 2018. This legislation established a ‘temporary permissions regime’ (TPR), enabling EEA firms and funds operating in the UK via a passport to continue their activities in the UK for a limited period after exit day.

2. Purpose

The Financial Services Contracts (Transitional and Saving Provisions) (EU Exit) Regulations 2019 establishes the Financial Services Contracts Regime (FSCR) to allow for the orderly wind down of the UK regulated activities of firms that do not enter the TPR or those that leave the TPR without full UK authorisation, by inserting provisions into the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. It will ensure that firms that do not gain full UK authorisation through the TPR can continue to carry out business to the extent necessary to run off pre-existing contractual obligations in the UK, but not to undertake new business. The SI provides for automatic entry into the regime for firms that do not enter the TPR, and those that leave the TPR without full UK authorisation. Within the FSCR those firms with a UK branch (currently operating under a freedom of establishment passport), firms who enter the TPR but exit it without UK authorisation, and firms that hold top-up permissions before the UK’s exit from the EU, will be placed into a supervised run-off (“SRO”). Those firms without a UK branch (currently operating under a freedom of services passport) that do not enter the TPR or do not hold a top-up permission will be placed into a contractual run-off (“CRO”).

3. The Supervised Run-off (SRO)

The SRO will work much in the same way as the TPR. Firms will be within the UK regulatory perimeter and will be ‘deemed’ Part 4A authorised for the purposes of winding down their UK regulated activities in an orderly manner. They will be regulated and supervised by the UK regulators like other Part 4A authorised firms, but will not be able to enter into new contracts with UK customers; they will only be allowed to carry out the regulated activities which are required to service their pre-existing contracts and wind down relevant contracts.

4. The Contractual Run-off (CRO)

CRO firms may not have an existing relationship with UK regulators. Under the CRO they will remain supervised by their home state regulators, as is currently the case. The CRO will work on the basis of a limited exemption from the general prohibition (Section19 of FSMA)—which states that no person may carry on a regulated activity in the UK unless that person is authorised or exempt—for the purposes of winding down UK regulated activities in an orderly manner. As with the SRO, providers will not be able to enter into new contracts with UK customers; they will only be allowed to carry out the regulated activities which are required to service their pre-existing contracts and wind down relevant contracts.

5. Moving firms between the SRO and the CRO

The SI gives the regulators the ability to move firms from the SRO to the CRO, and vice-versa. For example, if a firm with significant UK exposure enters the CRO, but the regulators feel that their statutory objectives would be served better if this firm was supervised in the UK, they can move it to the SRO.

6. Regime Length

Most financial services providers will be able to use this regime for five years after entry into the FSCR (whether they enter on exit day, or whether they enter after having been in the TPR for a period of time). This will allow the majority of contracts with UK customers to come to a natural conclusion, meaning there will be no significant impact for UK customers. Where providers have long-term contracts, five years is considered sufficient time to allow them to take mitigating action by, for example, transferring their contracts to a UK entity, to ensure that any impact on UK customers is minimised.

The exception to this five-year time limit is for contracts of insurance. Many long-term policies, such as life insurance, may take more than five years to come to a natural end. There will therefore be a longer time limit, of 15 years, for contracts of insurance, safeguarding UK customers who purchased their policies in good faith. The SI provides HM Treasury the power to extend the length of the FSCR by up to 5 years at a time in certain circumstances.

7. Financial Services Compensation Scheme (FSCS)

All firms in the regime with an establishment in the UK will have membership of the Financial Services Compensation Scheme (FSCS). Like any other member of the FSCS, these firms will be required to pay FSCS levies that fund the scheme. EEA insurers that currently operate in the UK via a passport but without an establishment are already FSCS members. In the regime, these firms will retain their existing FSCS membership and will continue to be required to pay levies. Other firms in the FSCR without an establishment in the UK will remain outside of the scope of the FSCS.

8. Senior Managers and Certification Regime (SMCR)

The SI provides the regulators with the discretion to choose to treat individuals to whom the Senior Managers and Certification Regime (SMCR) applies as having been granted approval under the sections of the Financial Services and Market Act 2000 relevant to the SMCR. It also makes provision to treat insurance firms’ existing supervisory approvals under Solvency II, originally granted by their home EEA state regulator, as granted by the relevant UK regulator whilst the firm is in the FSCR.