Loss of passporting rights will restrict EEA insurers' access to the UK market post-Brexit
We have set out below the three main options available to EEA insurers to ensure continuity of business.
For many groups, this is not the preferred option, not least due to the implications on capital and governance frameworks. The main advantage is that authorisation is not prohibited while the UK remains in the EU.
Most insurers with an established UK branch are instead seeking authorisation as a third country branch. This would minimise disruption to the existing business model and remove any need for portfolio transfers.
A key question has been whether a branch will be acceptable to UK regulators. The PRA has clarified its thinking on this. Key considerations will be the ‘supervisability’ of the firm as a whole, the PRA’s ability to establish effective regulatory dialogue with the home state regulator, the significance of the branch to the overall firm, how the branch will be used and ensuring adequate protection of UK branch policyholders (for example, no discrimination in a winding-up situation).
The PRA will consider a threshold based on the volume of UK business to be written that will be covered by the Financial Services Compensation Scheme (£500m of protected liabilities) and a number of qualitative factors, such as a lack of substitutable products available in the UK market, the significance of the proposed branch to the overall UK market in that line of business and the level of interconnectivity with other market participants. While the FSCS rules are complex, this broadly covers all life policies, all compulsory insurances and most general insurance policies held by individuals and small businesses. Exceeding the threshold would mean the PRA is likely to require a UK subsidiary.
A significant number of EEA insurers have no permanent UK establishment and currently access the UK through freedom of services (FOS) licences. These firms would generally prefer to maintain access without needing to establish a UK presence and undertake an authorisation process.
UK authorisation is required whenever any regulated activities are undertaken in the UK - rather than being based on the location of risk. This covers both “effecting” (new business) and “carrying out” (servicing of existing business) contracts of insurance. If all regulated activity occurs outside the UK, authorisation will not be required. However, this is not as simple as it sounds - for example, granting binding authorities to UK agents could be regarded as conducting UK regulated activities. We would advise firms that propose this use this route to confirm with the UK regulators that their operating model does not entail them carrying on unauthorised business.
Recent UK announcements indicate that measures will be taken, should the need arise, to ensure that existing insurance contracts held by UK policyholders can continue to be serviced by EEA insurers without breaching UK authorisation requirements. A “temporary permission” has also been proposed to effectively prevent loss of business to firms that are unable to secure the required authorisations pre-Brexit. While full details on both measures are as yet unknown, EEA insurers should not expect these to provide a permanent alternative to UK authorisation.
The UK and the EU have now reached “conditional” agreement on the main transition terms which should mean that, for most purposes, the UK would be treated as if it were a Member State until 31 December 2020. This would enable the continuation of passporting licences until the end of 2020, granting more time for firms to effect their end-state structure and obtain the required authorisations.
However, while this is a significant political milestone, it does not provide legal certainty, which will only be achieved once the full Withdrawal Agreement (which incorporates the terms of transition) is finalised and ratified by all parties, so firms need to continue with their contingency plans. Notwithstanding this, the back-stop put forward by the UK should mean that EEA insurers will have more time to effect any reorganisations required to effect their Brexit solutions.