The Financial Conduct Authority (FCA) has published Consultation Paper 19/2: Brexit and contractual continuity (CP19/2) which sets out details of the Financial Services Contracts Regime (FSCR) and the rules the FCA proposes should apply to firms during the regime.
To further reduce the risk of harm associated with an abrupt loss of permission on exit day, the UK Government have published draft legislation (the FSCR Regulations) to ensure that inbound EEA firms can still fulfil their existing contractual obligations in the UK for a limited period of time, even if they are outside the Temporary Permissions Regime (TPR) (proposed in CP18/29 and CP18/36)
In chapter 2 of CP19/2 the FCA sets out further details of the FSCR and the two mechanisms within it (supervised run-off and contractual run-off). In summary, the FCA’s proposed approach is to require supervised run-off (SRO) firms to comply, in respect of their UK business, with:
- all FCA rules which currently apply to them;
- all FCA rules which implement a requirement of an EU Directive which are currently reserved to the SRO firm’s home state and which the FCA does not currently apply to EEA firms (home state rules). The FCA intends to accept ‘substituted compliance’ for these rules. If firms can demonstrate they continue to comply with the equivalent home state rules in respect of their UK business (including where this is on a voluntary basis if the relevant rules cease to cover UK business) they will be deemed to comply with the FCA’s rules; and
- certain additional FCA rules which the regulator believes are necessary to provide appropriate consumer protection or relate to funding requirements. The deadline for comments on CP19/2 is 29 January 2019.
Chapter 3 of CP19/2 sets out how the FCA’s rules should apply to firms in the FSCR in respect of their UK activities. The aim of the FCA’s proposals in chapter 3 is to preserve the status quo as much as possible (in line with its approach for firms in the TPR). Generally, SRO firms will need to continue to comply with the rules which currently apply to them, either in the UK or in their home state.
The FSCR will be time limited depending on the type of regulated activity being performed. It will apply for a maximum of 5 years for all contracts except for insurance contracts and for a maximum of 15 years for those contracts. HM Treasury can extend these periods.
The FSCR will apply automatically to these firms. It will allow them to continue to service UK contracts entered into before exit day or before exiting the TPR for a limited period, provided that they can meet the conditions for the FSCR.
Contractual run-off firms (CRO firms) will be exempt from the general prohibition. Such firms will be required to remain authorised by their home state in order to benefit from the CRO exemption. Rules in the firm’s home state may continue to apply to its UK business. The FCA is also proposing that CRO firms pay a special project fee.
The deadline for comments on CP19/2 is 29th January 2019.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.