Post-Brexit insurance agreements could take years, warn lawyers

A future trade agreement on financial services and regulatory equivalence to remove new barriers to cross-border insurance between London’s insurance market and European buyers is unlikely to be achieved anytime soon, warn legal experts. Insurers had hoped that trade and regulatory agreements on insurance would be reached as part of Brexit negotiations. However, the UK has left the EU and the transition period with no such agreements in place. The last-minute trade deal between the EU and UK – the EU/UK Trade and Co-operation Agreement (TCA) – signed in December, contained nothing of substance on insurance, while the EU has yet to grant the UK’s insurance industry regulatory equivalence. Therefore, UK insurers’ access to Europe is comparable to a “hard Brexit”, Henry Dean, senior associate for financial institutions at law firm Eversheds Sutherland, told CRE. “The UK-EU trade deal didn’t contain much of comfort for insurers or brokers. It provides for continued access to markets, based on local rules and requirements. In other words, while the UK hasn’t been ‘frozen out’ of the European insurance market, to access it insurers and brokers need to comply with EU rules. This is pretty much the same as would have been the case in a hard Brexit,” he said. So, it is now harder for UK insurers and brokers to access the European market, unless they can do so from within Europe, explained Mr Dean. This is because they need to operate within European rules that require them to have a locally regulated entity to perform insurance underwriting and distribution. The position is slightly better for EU insurers and brokers that have been granted temporary access to the UK. However, the UK’s Temporary Permissions Regime and Financial Services Contract Regime set up to allow access are only stopgap initiatives. So, in the long term, EU insurers and brokers will also need to establish UK regulated offices to continue to operate, said Mr Dean. Having lost passporting rights, London market insurers and brokers are no longer able to freely service European clients out of the UK’s capital. Most international insurers and brokers have had to restructure and establish entities in the EU to maintain access, but many smaller insurers and brokers have not. Mathew Rutter, partner, insurance advisory at DAC Beachcroft, said it now “clearly harder” for UK insurers and brokers to underwrite and service European customers than it was before. This may dissuade some firms from doing so going forward, he said. “While the passporting regimes for insurers and brokers were far from perfect, they did at least create a presumption in favour of cross-border business, and certainly made the regulatory process much smoother. That added frictional cost we know has caused some firms to pull back from some activities at the margins, and I imagine that process will continue,” he said. Mr Rutter is hopeful that a trade deal on financial services is on the agenda but fears it could take longer than expected. “This is primarily about politics rather than anything else, so progress is likely to be slower than might be hoped,” he said. “I would urge UK insurers and brokers, both through their own channels and through their trade bodies, to set out very clearly to government what they are looking for in such a deal, and why that would be in the interests of the UK as a whole. Don’t assume someone else is having that conversation or hope that the message has got through,” said Mr Rutter. Despite coming in at more than 1,000 pages in total, the TCA has just five pages on financial services, noted Alistair Kinley, director of policy and government affairs at BLM. A separate ‘declarations’ document indicates that the UK and EU will finalise a memorandum of understanding (MoU) on financial services by the end of March 2021, but that will only be a roadmap. “It’s going to take years to cover off the necessary detail,” said Mr Kinley. “The door is still ajar for a future deal on financial services but at this stage it looks unlikely. The best we can hope for in the short and medium term is some degree of regulatory cooperation,” added Mr Dean. The UK and the EU agreed a ‘joint declaration’ on regulatory cooperation for financial services alongside the trade agreement. Under the declaration, parties will work together to “establish structured regulatory cooperation”. The big hope for international insurers is the prospect of the EU granting regulatory equivalence to the UK, as it has done for some aspects of insurance regulation to other third countries, such as Switzerland, Bermuda, Canada and Japan. Shortly before the end of the transitional period, the UK found the EU equivalent in respect of 28 areas of financial services, including under Solvency II. However, so far the EU has not reciprocated. It has only found the UK to be temporarily equivalent in respect of central counterparties for 18 months, and central security depositories for six months. It said there will be no extensions. And an EU-UK relationship founded on equivalence will only provide the insurance industry with limited benefits, according to Mr Dean. “Any benefits will mainly be of use to groups that have both a UK and EU presence – allowing them to be more streamlined in terms of group solvency and supervision. It also assists reinsurers looking to access either market. There are no equivalence provisions in the Insurance Distribution Directive, so the concept of equivalence is of no benefit to brokers that are only doing distribution, either into the EU or into the UK,” said Mr Dean. According to Mr Rutter, equivalence for insurers and brokers under current EU regimes is largely a “red herring”. “A lot has been said about equivalence, as if it’s some kind of substitute for passporting, but the truth is there is a very limited equivalence regime in Solvency II, and none at all in the Insurance Distribution Directive,” he said. Mr Rutter believes UK insurers should pursue a mutual recognition regime along the lines Switzerland and the EU have enjoyed for a number of years. However, any such regime risks effectively locking the UK into broadly tracking the relevant aspects of EU law, while having no formal ability to influence the direction of that law. So, there is always some degree of trade-off to consider, said Mr Rutter. In January, Bank of England governor Andrew Bailey said the price of equivalence would be too high if the UK became a rule-taker in return for access. These decisions are tied up in the politics, so developments may well not be quick, warned Mr Kinley. “The UK/EU MoU on financial services which is due in March – and may slip – rather vaguely refers to discussions on ‘how to move forward on both sides with equivalence determinations between the Union and the United Kingdom’, so it’s impossible to make an estimate about the timing of any equivalence decisions that the UK might be seeking,” he said. The issue of equivalence is entwined with the future direction of UK insurance regulation. Outside the EU, the UK is free to diverge from European rules, including Solvency II and the Insurance Distribution Directive. In October, the UK launched a Solvency II review with a call for evidence. However, UK insurance regulation is not expected to change dramatically in the foreseeable future. “I don’t expect significant changes to insurance regulation in the short term, particularly given the UK’s propensity to goldplate EU requirements in the past,” said Mr Rutter. “If UK policymakers are inclined to try to reduce the regulatory burden, there has been very little evidence of that over the past few years, so it would require a significant culture change at the regulators and strong leadership, given that the ‘safe’ option always tends towards more regulation, not less,” he said. The UK Treasury’s review of Solvency II is looking at technical aspects, like the risk-free rate, to see if they can be changed to better operate in the UK environment, explained Mr Dean. “While some divergence between the UK regime and the EU regime over time is inevitable, it is unlikely that the two will depart radically. The EU and the UK insurance markets are still very close, so it is in neither side’s interest to allow for a big departure that might prevent future trade,” he said.

Post-Brexit insurance agreements could take years, warn lawyers

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