Six months after this upldate was published, we've not seen any cases where the applicants have been asked for anything going back further than the last 5 years.

The Good Character Guidance was updated at the end of September to include a reference to lawful residence of EEA nationals and their family members under the compliance with immigration requirements section. This ties in with the treaty rights criteria under lawful residence.

If you have a PR card, the guidance says:

If an EEA or Swiss national or their family member has a permanent residence card, you can accept that they complied with immigration requirements in the UK for the 5year period before it was issued, and the period since then. This is provided they have not lost their permanent residence, for example by being out of the UK for more than 2 years
If you have settled status, the guidance says:

You must assess whether the applicant was exercising a Treaty right and therefore complying with the requirements of the EEA Regulations 2016. Guidance on naturalisation as a British citizen by discretion explains how to consider lawful residence by EEA nationals in relation to applications for citizenship and how to exercise discretion over immigration breaches in the relevant qualifying period. You must consider whether it is appropriate to exercise discretion in the person’s favour or whether it is appropriate to refuse the application because they do not meet the good character requirement.
The CSI requirement

The guidance says the following:

Comprehensive Sickness Insurance (CSI) is a legal requirement for EEA and Swiss students, self-sufficient persons and their family members who are residing in the UK with them.

If a person did not have CSI, you must consider why they did not have it. Where a person has been granted ILR under the EUSS but has been in breach of the EEA Regulations 2016 due to a lack of CSI you must consider whether it is appropriate to exercise discretion in their favour.

Some applicants will have previously been refused permanent residence on the basis of not having CSI. When considering whether it is appropriate to exercise discretion, you must assess the reasons given for this, and why they did not then obtain CSI.

For further information on how to exercise discretion in relation to immigration breaches see guidance on naturalisation as a British citizen by discretion.
CSI cannot be applied with retroactive effect, taking it up now would be totally pointless.
As can be seen above, there is mention of discretion throughout, however, there's no indication regarding when that discretion will be exercised or on what grounds.

The CSI requirement is not new, before we had the EU Settlement Scheme, all EEA nationals applying for citizenship had to apply for a PR card (unless they had ILR), and if they were self-sufficient or a student during their qualifying period, would have come across the CSI issue.

People who were self-employed or working have never been required to have CSI.

You may have had an alternative right to reside, for example, as a dependent of someone who was exercising treaty rights, having acquired PR status during an earlier period, etc. See: Lawful residence for naturalisation

Lawful residence on the AN form

Once you finish answering questions, you will reach the section headed Documents, where you will find a checklist of documents to be provided, depending on the answers given on the form. This checklist will usually have the items shown below, please note that there is no mention of anything about proving lawful residence for 10 years, just for the relevant 3 or 5 year period.

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You need to tick the boxes in order to proceed.

Lawyer opinion

One of our lawyers has written an article with his views on this subject: Naturalisation and the ‘CSI problem’ | Truth Legal Solicitors

In his article, he mentions the following:

The following summarises my own views on how to approach the area of discretion, based on my reading of the guidance backed up with some anecdotal evidence:
  1. A CSI transgression over the five (or potentially three) years immediately preceding the date of application is more serious than one covering the rest of the 10-year period
  2. If you were previously refused a permanent residence card due to the CSI issue, and did not then obtain CSI, then you would need some strong mitigation (and evidence) to overcome this
  3. If you are going to argue discretion, make as strong a case as possible. If you were simply unaware of the CSI rule, it may help you to advance any personal reasons why you were not able to understand the rule? You might also want to provide additional evidence to show that you are generally a ‘good person’? For example, can you evidence a ‘positive contribution’ to UK society. Bear in mind that your application will fall on the desk of a UKVI caseworker who is operating with a similar lack of clear guidance. There appears to be a lot of discretion, so make the caseworker want to grant in your favour!

Final thoughts

If you think you have a ‘CSI problem’, then you might consider the following:
  1. Have you checked whether, during the problematic period, you in fact derived a right of residence through some other means, such as a being a ‘family member’?
  2. Failing that, how long would you have to wait until the ‘problematic period’ is outside of the relevant computation period? The shorted the wait, the greater the argument to sit this out and apply later.
  3. Does your problematic period fall within the five (or three) year period, or within a later part of the 10-year period? If it in a later period, then it appears to be less problematic.
  4. Consider whether you should get legal advice, see below.
As ever, my legal analysis above is my own take on the CSI issue, based on Home Office guidance which lacks clarity, and based on anecdotal evidence. Others may take a different view.

Common myths and misunderstandings
I never used the NHS, went to my own country for treatment, paid for private treatment in the UK, etc.
The CSI requirement comes from EU Directives that apply to all member states. Having used the NHS or otherwise does not come into it. Nobody will check your NHS usage or records, they just want proof of CSI cover when it was required.
Since when?
This is a new thing, only from this year, or only from 2016, the Regulations in question are from 2016, so how can they affect my residence before that?
It was a requirement as early as 1990, it was in place in the EEA Regulations 2000, and even the Immigration (European Economic Area) Order 1994. It was also in the EEA Regulations 2006 which were very similar to the current 2016 ones.
CSI after the period of studies or self-sufficiency
I'm considering buying CSI, I've had it for a few months, etc.
The cover should have been in placed during the relevant period of residence as a student or self-sufficient persion, before being granted settled or pre-settled status. CSI cannot be applied with retroactive effect.
CSI for the future, after pre-settled status
I have pre-settled status and I want to make sure I can apply for citizenship when I'm eligible so I'm buying CSI to make sure I'm here lawfully.
CSI is not required after getting settled or pre-settled status, you are lawfully resident under that status regardless.
I got a PR card in 2016, since then I've been studying with no CSI, so I guess I wasn't lawfully resident.
PR will become invalid next year, will I need CSI?
Once you acquire PR status, you no longer need to exercise treaty rights, have CSI for periods of studies or self-employment, etc. since you are lawfully resident under that status. Although PR cards will stop being valid next year, PR status acquired in the past will still make you lawfully resident during the relevant periods, and the PR card can still be used to establish that fact, even when the citizenship application will have to rely on settled status.
Unemployment and CSI
I was unemployed for a year but I was still covered by my EHIC card or health policy from my country.
CSI is required for lawful residence for students and self-sufficient persons, if you were claiming benefits, then you were not self-sufficient and having had CSI wouldn't make you self-sufficient if you relied on public funds.
I had a gap in employment of 3 weeks/3 months, I didn't claim any benefits but didn't have CSI.
Gaps of up to 6 months exercising treaty rights do not break the period of lawful residence.
National Insurance Contributions
I was unemployed for 2 years but have full NIC records for those years.
I have NIC gaps, will that affect the application?
Can I pay voluntary contributions to fill the NIC gaps?
This isn't about NICs but lawful residence under EU rules. If you claim certain benefits, you would have NICs credited to your NI record and you could have full years without having paid a penny, this doesn't mean you were lawfully resident under EU rules. Voluntary contributions go towards your UK state pension, they have no relevance to lawful residence nor citizenship applications.
This is all to do with Brexit/the end of the transition period. Next year they can do what they want. Things would be worse if we have no deal.
Isn't this a breach of the Withdrawal Agreement?
UK citizenship is not part of the Withdrawal Agreement, nor of any deal with the EU. The EU does not get involved in member states' nationality rules, each country has their own rules, for example, some EU countries do not allow dual citizenship, others only in limited circumstances, some allow citizenship by marriage without residence, some require 10 years' residence, etc. The EU is only concerned with RESIDENCE in member states, not citizenship.

What to do?

If you think you may be affected by this, you may want to wait until we have more clarity regarding how the Home Office will consider these applications and under what circumstances they are exercising discretion. Things will become clearer in time, when we see this implemented in practice.

There is no requirement to be British for any practical purposes, other than voting rights, otherwise, settled status is all you need to carry on living here with full access to healthcare, benefits, etc. on the same terms as British nationals.

You could consider writing a cover letter to explain that you were never aware of the requirement, for example, because the university or college you enrolled with never mentioned it. At this point, we don't know how they will consider such arguments, and every case is different. In the event of being refused, the fee is non refundable, so this is something to always bear in mind.

If there's a reason why can't wait to apply for citizenship, and you think you may fall foul of these requirements, you may want to arrange a consultation with an authorised immigration lawyer. We have a team of lawyers who volunteer for the group and also offer private legal advice, their details are found here: Lawyers.

Applications already submitted and in progress

A number of members who did not meet the treaty rights criteria submitted their applications before the Home Office updated their guidance on this on May 15th. So far, they have all been successful, so this would indicate that they are exercising discretion with the applications already submitted, as they could leave themselves open to a legal challenge if they refused applications made when the applicant was not aware that any of this would be taken into account, so we expect something similar in this respect. So far, we have seen no refusals on these grounds.