Dealing with the Brexit afterburn

Outside the EU, the London insurance market could become a market-friendly alternative to Bermuda. But there is a lot to be resolved with the bloc’s 27 member states before that can happen, according to Garry Booth Shrouded by the Covid-19 lockdown, the signing of a new post-Brexit financial services pact in March caused little more than a ripple of interest across the insurance sector. But a lot still hinges on the so-called memorandum of understanding (MoU), an agreement between the UK and the EU that will allow both parties to cooperate on regulation. As it stands, the MoU does nothing to improve the City of London’s – and the London insurance market’s – access to the bloc, and a number of questions remain unanswered concerning cross-border business. The UK and EU have concluded a trade agreement, but to the growing concern of UK banks and insurers it contains very little on the provision of financial services. The UK effectively left the EU single market, including for insurance and insurance distribution, after the transition period ended on 31 December 2020 and it is now a third country as far as the EU is concerned. It means that UK (re)insurers and intermediaries can no longer “passport” their UK authorisations across Europe, and European (re)insurers and intermediaries can no longer passport into the UK. Existing EU law (regulations and treaties but not directives) was transposed into UK statute, albeit with powers to amend it in the future. The loss of passporting was widely anticipated since the UK Brexit referendum in 2016 by insurers and brokers. Those using UK-authorised firms to access EU markets have taken steps to make sure they can serve markets in the EU, by setting up separately licensed entities in an EU member state and making portfolio transfers. For its part, the UK brought in a Temporary Permissions Regime that allows EU firms previously passporting into the UK to continue operating in the UK for three years while obtaining authorisation from the Prudential Regulation Authority (PRA). Any firms whose applications fail will automatically enter into a framework for the orderly runoff of their UK business activities. The picture across Europe is less clear, as member states have taken steps independently to introduce regimes that apply to UK insurers (and intermediaries) since the end of the Brexit transition period. Although recommendations were made by the European Insurance and Occupational Pensions Authority (Eiopa), there is no specific regime and as far as UK firms are concerned, the EU is now a patchwork of differing provisions for the runoff of their EU books. Loose ends Anecdotally, the compliance situation is not cut and dried even for insurance entities with licensed operations in the EU. Legal experts have pointed to possible questions being raised over substance in European jurisdictions and whether independent directors and c-suite employees are required ‘in-country’. The effective domicile of people and expertise is another potential issue, along with the extent of activities that can be carried out in the UK branch of an EU-authorised (re)insurer. Lloyd’s Europe, for example, recently ran into trouble with the Belgian Financial Services and Markets Authority (FSMA) when it looked more closely at the outsourcing arrangements of managing agents. The FSMA suggested that some managing agents were effectively in breach of rules because analysing submissions and pricing risks or preparing final quotes amounted to insurance mediation activities. Such concerns about regulated activities are especially relevant for insurance brokers operating across borders from the UK. Intermediaries in the EU27 are governed by the Insurance Distribution Directive, which is implemented differently by member states. It means there are wide variations in its requirements across member states that third country entities need to be aware of. Eiopa has made it clear that brokers wanting to register a licensed operation have to demonstrate appropriate corporate substance according to the nature, scale and complexity of their business – it’s not possible to have a brass-plate operation. In search of equivalence With blanket access for the UK’s financial firms to the EU now ended, much rides on the EU system known as equivalence. The UK has already granted the EU full equivalence under Solvency II (and in other areas) and it is intended that the recently signed MoU will enable discussions on how to advance with equivalence determinations from the EU perspective. Importantly, the EU has stated that it will consider equivalence decisions when they are in the EU's interest, but emphasised that it needs to better understand how the UK intends to amend or alter rules in future. The key areas relating to Solvency II currently being examined by the PRA have a more domestic, life-oriented focus and include the recalibration of the matching adjustment and reform of the risk margin. Reporting requirements and the integration of the UK’s Green Finance Strategy, which could influence investment choices, are also under review, however. If, as seems likely, the EU insists the UK must agree not to diverge from EU regulations as a requirement for equivalence, any decisions could be a long time coming from Brussels. Speaking at a briefing webinar broadcast by the lawyers Debevoise & Plimpton, Ben Lyon, an international counsel at the firm, said he expected industry groups to lean heavily on the UK government to back the insurance industry. “But the Bank of England, the PRA and the FCA are not going to support wide-ranging political efforts to move too far away from our current Solvency II regime,” Mr Lyon said. “Changes will likely be incremental and not seismic.” If and when the EU eventually does grant Solvency II equivalence status to the UK, it will come with conditions. Foremost will be the requirement for the UK to consult the EU for pre-approval of any changes to the regulatory regime – a red line for many Brexiteers. Mr Lyon predicted that there will be a slow regulatory divergence between UK and Europe – with bumps in the road along the way. Speaking to GRM after the webinar, Clare Swirski, international consultant at Debevoise & Plimpton, said the opportunity to tailor regulation better and reduce reporting could ultimately boost the London market’s profile: “There is a balance to be struck between regulatory divergence and equivalence. The UK has always gold-plated regulation from Europe, so the UK won’t become less well regulated – but the right changes could make it easier to do business with, compared with European centres. “Operating outside the EU, UK regulators could become more flexible and accessible, much like the Bermuda authorities, without comprising their main objectives of protecting policyholders,” concluded Ms Swirski. LONDON URGES REGULATORS TO SEIZE THE DAY The London insurance market could have a bright future outside Europe – if the UK government moves to make regulation work better for underwriters and brokers. The London Market Group of insurers and brokers is calling for a more proportionate approach to regulation that recognises the nature of large, complex risks. Individual consumers and SMEs still need consumer-like protection but large corporate clients who have their own professional brokers and advisers need much less, the LMG says in an open letter published in June. “The FCA makes almost no distinction in the way it supervises a London market broker working in the specialty markets in London from the way it supervises a retail insurance broker dealing with an individual’s domestic and motor insurance requirements,” the LMG says. The LMG also urges the government to bring forward proposals for international competitiveness to become part of the regulator’s statutory objectives, as it is in Bermuda or Singapore: “An international competitiveness objective could be used to benchmark against other international financial services hubs, and be used to help nurture innovative new products and promote the reputation and good governance of the UK industry to overseas investors.” The current Solvency II review offers the government two further opportunities to broaden London’s role as a risk transfer hub. According to the LMG, it could develop a more attractive regime for captive insurers and also for foreign reinsurance companies. “No company has chosen to set up a captive in the UK, despite our extensive financial services ecosystem. This is despite the fact that London market brokers have world-leading experience of managing their clients’ captives across the world and could easily replicate these services within the UK,” the LMG says.

Dealing with the Brexit afterburn

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