On 8 January 2019 the FCA published a consultation paper, 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.  The consultation closes on 29 January 2019.
 
The legislative bones of the regime are set out in the draft Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019. A draft of this regulation has been laid before Parliament for approval.
 
The FSCR will allow EEA firms to continue to service pre-existing UK contracts entered into before exit day or before exiting the temporary permissions regime (TPR) for a limited period, provided they meet the conditions of the FSCR. Further details about the conditions of the regime can be found in Chapter 2 of the consultation paper.
 
Unlike the TPR (see details below), the FSCR will not allow these firms to undertake new business in the UK post-exit day.
 
Firms will fall into one of two categories under the FSCR: supervised run-off (SRO) or contractual run-off (CRO). 
 
SRO

In brief, the SRO will apply to the following firms ("SRO firms"):

• firms currently operating in the UK via a branch;
• firms who enter the TPR but exit without securing full UK authorisation; and
• firms that currently hold top-up permissions. 

As is the case for firms in the TPR (TP firms), SRO firms will be deemed to have Part 4A permission for carrying out activities within the scope of their passport as at exit day to the extent necessary to continue to service pre-existing contracts in the UK.  Unlike the TPR, no notification is required for this deemed permission to arise – it will apply automatically. Details of SRO firms will be shown on the Financial Services Register. 
 
The FCA's powers over SRO firms under FSMA will continue to apply; however, the FCA will also cover certain matters which were previously handled by the firms’ home state.  In addition, SRO firms will be required to maintain their home-state authorisation in order to benefit from the regime.
 
CRO

The CRO will apply to firms operating in the UK solely on a services basis (i.e. without a UK branch) that do not enter the TPR and have pre-existing contracts in the UK which would otherwise require a permission in order to service ("CRO firms").
 
CRO firms will be treated as exempt persons and will not be UK authorised. Similarly to the SRO, this exempt status will allow firms to perform regulated activities within the scope of their passport as at exit day to the extent necessary to continue to service pre-existing contracts in the UK after exit day.
 
The FSCR will apply for a maximum of 5 years for all contracts, except for insurance contracts which will have a maximum of 15 years. The Treasury may extend these periods, if necessary, based on a joint assessment by the FCA and the PRA.
 
The FCA has stressed that EEA firms should consider their planned post-Brexit activities in the UK and should assess what steps to take before exit day.  For example, firms that require more flexibility in the activities they are permitted to carry on under authorisation should consider entering the TPR.
 
The TPR

The TPR was proposed by HM Treasury as a temporary measure to replace the current passporting regime under FSMA in the event of a no-deal Brexit. The legislative framework for the TPR is found in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.
 
The TPR will allow EEA-based firms currently passporting into the UK to carry on new and existing regulated business within the scope of their current permissions under Part 4A of FSMA for a maximum of 3 years (subject to HM Treasury' power to extend the regime by increments of 12 months) if there is a no-deal Brexit. This deemed Part 4A permission will mean that a TP firm will continue to be an authorised person for the purpose of UK law.
 
The purpose of this temporary permission is to give firms time to seek full UK authorisation. Firms that intend to enter the TPR must notify the PRA and/or the FCA of their intention. The notification window is open now until 28 March 2019.
 
Notably, the TPR is a one-way street: it will not enable UK firms to operate in the EEA in a no-deal scenario. At present, there is no indication that the EU or individual member states will be implementing reciprocal regimes.
 
PRA Supervision

Dual-regulated firms in the TPR ("PRA firms") will be treated as third country firms with Part 4A authorisation. The PRA expects PRA firms with a UK branch to comply with the same rules that apply to other third country branch firms. For PRA firms operating in the UK without a branch, the PRA will apply the following, more limited provisions of its Rulebook: Fundamental Rules, Auditors, Change in Control, Close Links, Fees, General Provisions, Information Gathering, Interpretation, Notifications and Use of Skilled Persons, Senior Managers & Certification Regime requirements, and Financial Services Compensation Scheme rules (with some adjustments).
 
The PRA's consultation on its proposed amendments to its Rulebook to give effect to the TPR (CP26/18) closed on 2 January 2019 – it is yet to publish a policy statement detailing its final amendments.
 
FCA Supervision

FCA solo-regulated firms in the TPR ("FCA firms") will also be treated as third country firms with Part 4A permission. However, the FCA's proposed approach is to only apply the following rules to these firms: 

• rules which currently apply to FCA firms;
• rules which implement an EU Directive requirement which is reserved to the FCA firm's home state, albeit in such cases firms which comply with the home state rule will be deemed to comply with the FCA's rule ("substituted compliance"); and
• certain other FCA rules necessary for consumer protection or funding. 

The FCA also intends to introduce a new Chapter 14 in its Client Assets sourcebook to include rules for FCA firms which receive or hold client assets in connection with insurance mediation, implementing the Insurance Distribution Directive.
 
The FCA launched two consultations for its proposals for implementing the TPR (CP18/29 and CP18/36). Both are now closed and the FCA is expected to publish its feedback and final rules following on from these consultations in the first quarter of 2019.

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