Financial Services Contracts Regime

Introduction

Since the transition period ended at 11pm on 31 December 2020, the FSCR is now in effect.

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

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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 TPR and to allow for the orderly wind down of the UK regulated activities of firms that:

• were passporting prior to the end of the transition period 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 EEA home state authorisation.

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 formerly operated under a freedom of services (FOS) passport immediately before the end of the transition period) which did not hold a top-up permission and did not enter TPR. These firms entered CRO automatically by operation of law after the end of the transition period.

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

To be in the CRO a necessary condition is that the firm is authorised by its EEA home state regulator.

CROs is based on a limited exemption to the general prohibition for the purposes of winding down firms’ UK regulated activities in an orderly manner.  

Supervised Run-Off (SRO)

Multiple categories of firms fall within the SRO. This includes firms:

• with a UK branch (which formerly operated under a freedom of establishment (FOE) passport immediately before the end of the transition period) 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 (formerly operating under an FOE or FOS passport immediately before the end of the transition period); and
• that held top-up permissions before the UK’s exit from the EU and were formerly operating under an FOE or FOS passport immediately before the end of the transition period

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 are 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	Former FOE firms and FOS firms (with top-up permission) which did not enter into TPR All former FOE firms and FOS firms which exit TPR without authorisation in relation to all of the regulated activities which they carry out.	Former FOS firms (without top-up permission) that did 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 the end of the transition period.

Regulatory requirements for firms in SRO 

Firms in SRO are deemed to be UK authorised firms.  We 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 are required to comply with the same rules that apply to other third country branches. These are available to view in the PRA Rulebook. Opens in a new window

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 PRA has amended the definition of non-Directive insurer 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 formerly operating under FOE and FOS passports as well as insurers formerly operating under FOE and FOS passports), upon entry into SRO, are required to provide a run off plan describing their plans to run-off their business before the mechanism expires. Furthermore, firms are 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 are 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 has entered SRO directly or via TPR, a firm should 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 entering SRO at the end of the transition period should ensure that they submit the relevant Senior Managers and Certification Regime forms within six weeks from the end of the transition period to enable individuals to obtain a deemed approval by 12 weeks from the end of the transition period.

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 operating in the UK as a branch but not to any other firms.

Status disclosure to retail clients

Firms in SRO are 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 previously granted firms in SRO a three month transitional relief (ending on 31 March 2021) in respect of the requirement to use specific, bespoke wording for their status disclosures to retail customers. During the three months of transitional relief firms were able to use either the previously existing wording for EEA firms or the new prescribed wording. 

Transitional relief for firms in SRO

Since the transition period ended at 11pm on 31 December 2020, EU law no longer applies in the UK. The temporary transitional powers are available for use by the regulators until two years from the end of the transition period.

The PRA previously granted firms in SRO transitional relief in relation to certain aspects of the following third country branch requirements as follows. Note; all the following transitional relief provisions have now expired and firms are required to comply with all third country branch requirements applicable to them in SRO:

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

This section sets out the FSCS rules that apply to firms in the FSCR after the end of the transition period. 

FSCS members

Deposit-takers with an establishment in the UK, and insurers that are in the FSCR, are 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) are protected by the FSCS.

Note: there is a waiver by consent available to waive certain requirements contained in the Depositor Protection Part of the PRA Rulebook in relation to Continuity of Access. 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) are not protected by the FSCS.

Insurance

Insurance Policies issued before the end of the transition period

Existing FSCS protection for insurance policies issued prior to the end of the transition period 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 are also required to pay FSCS levies.

Insurance Policies issued after the end of the transition period

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 the end of the transition period by SRO insurers with a UK establishment, FSCS protection applies 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 are eligible for protection. If there are policies issued after the end of the transition period by SRO or CRO insurers without a UK establishment, FSCS protection is only 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 will 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 website.