On the UK’s exit from the EU, EEA financial services providers currently exercising EEA passporting rights in the UK will lose these rights. To mitigate this abrupt loss of rights, HM Treasury has published a draft statutory instrument (SI), the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, accompanied by an explanatory note, which aims to create a "Financial Services Contracts Regime" (FSCR). The FSCR applies automatically to firms that do not enter the TPR or those that leave the TPR without full UK authorisation. It aims to allow for the orderly wind down of their UK regulated activities. Such firms will be able to continue to carry out business to the extent necessary to run off pre-existing contractual obligations in the UK (for five years from the date of entering the regime, or 15 years for contracts of insurance), but not to undertake new business. HM Treasury has the power to extend the regime under certain circumstances. Further details are given in an Annex to the explanatory note, Run-off regime for EEA firms that currently passport into the UK under Financial Services and Markets Act 2000. HM Treasury intends to lay the SI before Parliament before the UK’s exit.
In a statement on the FSCR, the FCA emphasises that the regime is created solely to allow EEA firms that currently passport into the UK to run off existing UK contractual obligations and conduct an orderly exit from the UK market.
EEA firms that do not enter the TPR or those that leave the TPR without full UK authorisation are categorised into two buckets under the FSCR:
- supervised run-off (SRO) – similar to the TPR, these EEA firms will be deemed as authorised and will be regulated and supervised by the UK regulators. SRO is for EEA firms with a UK branch, firms that enter the TPR but exit without UK authorisation and firms that hold top-up permissions before exit day; and
- contractual run-off (CRO) – firms under this regime may not have an existing relationship with UK regulators and will remain supervised by their home state regulators. CRO is for firms without a UK branch that do not enter the TPR or do not hold top-up permissions.
Under both categories, the firms 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.
Firms can be moved between SRO and CRO at the discretion of the regulators but will still need to be authorised in their home state and must notify the FCA if their authorisation is cancelled or varied.
The FCA has published a consultation paper "Brexit and contractual continuity" (CP19/2) which sets out the details of the FSCR and the rules the FCA proposes to apply to firms in the regime. The consultation period ends on 29 January 2019.
EEA firms managing UK authorised funds will not be able to continue to manage those funds under FSCR after exit day. Those firms should notify the FCA in order to enter the TPR to benefit from the transitional period. The same applies to trustees or depositaries of such funds.