As EU financial services regulator emphasises impact of a no-deal Brexit, UK institutions signal a more pragmatic approach

The European Insurance and Occupational Pensions Authority (EIOPA) published a new opinion paper (5-page / 199KB PDF) on 21 December, reminding financial services regulators and insurance firms to take all necessary steps to ensure service continuity for cross-border insurance risks underwritten before the UK formally withdraws from the European Union.

In this opinion paper, EIOPA reiterated the importance for financial services regulators and insurance firms to consider how they intend to continue to fulfil their existing insurance obligations after Brexit, no matter what the post-Brexit landscape might be. It suggests options that insurance firms will be familiar with; namely transfers of books of cross-border insurance business, establishing branches and subsidiaries in the UK or in EU local jurisdictions or changing UK undertakings incorporated in the legal form of a European company to local domicile.

EIOPA's latest opinion paper follows previous comments of its chair, Gabriel Bernadino, that UK financial firms should not rely on local regulators in EU countries taking a relaxed approach to the regulation of cross-border contracts post-Brexit. 

This latest opinion from EIOPA does not introduce any new thinking and the options proposed for contingency plans would not come as any surprise to financial services businesses that have already considered restructuring.  By requiring regulators and insurance firms to take matters into their own hands, EIOPA has effectively asked the industry to ignore any developments in political negotiations, in case reliance is placed on proposed solutions that may not ultimately materialise.

There have been other recent developments that could have a material impact on financial services businesses. On 15 December 2017, the European Council confirmed that sufficient progress had been made to move to the second phase of negotiations, which Theresa May has said she expects to cover a transition (or 'implementation') period following formal withdrawal. Although the final nature of any implementation period is yet to be agreed, UK regulators anticipate that, during such a period, firms would be able to continue to benefit from 'passporting' rights between the UK and the EEA.

HM Treasury also published a short statement on 20 December, in which it announced that it intended to provide the means by which UK regulators could issue temporary permissions to firms. In a public letter dated 20 December, Sam Woods, CEO of the Prudential Regulation Authority (PRA), welcomed this proposal although said that the PRA would only use it as a fall-back. These are important messages coming from the Treasury and UK Regulators on the likely pragmatic steps they could take to try to alleviate short term issues caused by a sudden Brexit in 2019. 

The PRA also suggested that firms passporting into the UK, whose home state regulators are from EU member state jurisdictions, can assume that they will be able to apply to have a branch established in the UK to be authorised for post-Brexit business. However, those EU firms that are likely to accrue more than £200 million of FSCS-protected liabilities in the UK should apply for authorisation as a subsidiary rather than conducting business through a branch.

The longer-term picture remains unclear as it is subject to what will still clearly be heavily-politicised negotiations between the UK and the EU. Despite widespread support from UK regulators and insurance firms for a financial services-specific free trade deal between the UK and the EU, it is currently uncertain whether financial services will form part of any final trade agreement. Michel Barnier, Chief Brexit negotiator for the EU, has stated that a post-Brexit trade deal will not include financial services, with loss of passporting rights being a consequence of the UK's decision to leave the bloc. However, Theresa May and David Davis remain confident that any trade agreement reached between the UK and EU will represent a "good deal for a financial services" and David Davis has suggested that to leave financial services out would amount to the kind of "cherry picking" that the EU does not want to apply to the UK's position post-Brexit.

 Whilst firms will still need to be making immediate preparations finalise their arrangements in advance of Brexit, the industry may at least take some encouragement from the more positive developments in Brexit negotiations and from the UK.

Tobin Ashby is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.