EIOPA confirms no shortcuts open to UK insurers seeking to maintain access to the EU market post-Brexit, says expert

Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said the European Insurance and Occupational Pensions Authority (EIOPA) had issued a "clear message of its expectations" about the consistency of regulatory standards and procedures that should be applied to insurers based in London and other UK financial centres that seek to relocate, or set up new business operations, in a remaining EU country ahead of Brexit.

EIOPA issued a new opinion on supervisory convergence in light of the UK withdrawing from the EU (7-page / 124KB PDF) on Tuesday. The opinion assumed that Brexit would see the UK leave the EU's single market and become a "third country" for the purposes of the Solvency II regime. Solvency II provides for insurers to carry out business across the EU as long as they have been authorised in the EU.

EIOPA recognised that the UK is currently the EU's "most important financial centre" and said Brexit presents a "unique situation" that "requires a common effort at EU level to ensure a consistent supervisory approach to the relocation of undertakings". It said it had already visited some regulators based within the trading bloc to discuss "the processes and resources in place to deal with potential relocations" stemming from Brexit.

It said, though, that regulators across the remaining 27 EU member states must not lower standards or ignore regulatory requirements when seeking to attract London-based insurance firms to relocate or set up new business operations in their country.

In its opinion, EIOPA said that, upon Brexit, UK-based insurance and reinsurance firms will "lose their right to conduct business across the EU member states by way of freedom of establishment and freedom to provide services". As a result, some firms may decide to relocate or establish new business operations within a remaining EU member state "in order to maintain access to the EU single market", it said.

EIOPA said that insurers that are authorised by the Financial Conduct Authority (FCA) in the UK will not be able to benefit from "any automatic recognition" of that authorisation by regulators based elsewhere in the EU when seeking to relocate to, or set up new business operations in, that country.

"No recognition of authorisations granted by other authorities is foreseen in Union law nor would the conditions of authorisation be identical to those which the initial authorising authority had to examine before granting an authorisation," EIOPA said. "Hence there cannot be any automatic recognition of an authorisation granted by another supervisory authority. An application is reviewed on its own merits and the required review process should be completed."

EIOPA said regulators should assess insurers' business models and any uncertainties associated with their business strategies, as well as how the firm intends to manage those, as part of a "prospective and risk-based assessment of the authorisation". It also said regulators should scrutinise the firms' "governance structure, human and technical resources, geographical distribution of activities, as well as outsourcing arrangements", among other things.

EIOPA said that it is the job of regulators to ensure that UK firms looking to make use of outsourcing arrangements to carry on their activities across the EU market post-Brexit are effectively supervised.

"In particular where the service provider is part of the same group, supervisors should carefully assess the undertaking’s ability to control and influence the actions of a service provider to which critical or important functions or activities are outsourced," EIOPA said. "This should involve assessing the undertaking’s access to data, premises and involvement in decision-making in relation to its business."

"In particular where the service provider is located in a third country, access to information and to the service provider’s premises, by the undertaking and supervisor should be guaranteed. The cooperation between relevant supervisory authorities to guarantee, where relevant, on-site inspections to service providers, should be ensured," it said.

Tobin Ashby of Pinsent Masons said the EIOPA opinion follows previous guidance issued by the European Securities and Markets Authority (ESMA) on Brexit issues. He said EIOPA had given a "clear message that it expects consistency from regulators across member states in the context of increasing numbers of applications for authorisation and approvals for relocation in advance of Brexit".

Ashby said: "This was not unexpected, but EIOPA is at pains to confirm that there can be no automatic recognition of authorisation from another supervisory authority and that all new applications must be treated on their own merits. EIOPA further takes the opportunity to encourage local regulators to challenge any proposed risk transfer arrangements." 

"The message for insurers considering how to restructure cross-border business both into and out of the UK to allow for Brexit, is that they are unlikely to be able to rely on minimal 'fronting' arrangements that allow them to continue business as currently with just a notional regulatory base in another EU jurisdiction to allow them to replicate current passporting arrangements," he said.