The Prudential Regulatory Authority’s 14th July deadline for firms to provide confirmation they have a “worse-case scenario” plan for trading with the European Union post Brexit leaves insurers with no choice but to address the issue immediately.
In a letter to regulated firms, the PRA said that it had found the response from the financial services sector to the potential removal of current passporting rights was “uneven” with plans not sufficiently tested against the “most adverse potential outcomes”.
The regulator is now demanding that firms confirm they have plans in place and underway to deal with all potential outcomes. However, experts at international accountants and advisers Moore Stephens said medium to small insurers will be hit hardest by the PRA’s stance.
“There have been some companies that were in effect ‘sitting on the fence’ over the issue of redomiciling and waiting to see where the rest of the market moved,” said Alex Barnes, Partner at Moore Stephens. “Two and half months may seem a decent period of time, but firms will need to finalise their plans and discuss them at board level before they submit them to the PRA by the July deadline.”
Moore Stephens Partner and regulatory expert Michael Butler added: “The PRA is fully aware of the length of time it takes for regulatory authorisation and therefore it is likely that once the assurances have been submitted in July, the PRA will want to see proof that applications have been made where required by March 2018 to ensure they and other European regulators have the required period to assess them ahead of a ‘cliff edge’ Brexit in March 2019. There are clearly larger insurers that have existing offices across the EU and therefore will be able to move books of business to those branches. The problem may well be for the medium to small mono line insurers.”
Moore Stephens has recently carried out its own research into the attitude of the insurance sector to Brexit and found:
- over 40% intend to change operation model due to exit;
- 30% intend to create operations in another jurisdiction and 15% intend to increase operations in another jurisdiction;
- the top three locations were Ireland, Luxembourg and Germany;
- the key drivers for choosing said countries were the opportunities for new business in that region, the availability of skills and expertise and the legal framework that exists there;
- 1 in 6 would consider Scotland as a possible jurisdiction if it was to stay within the EU;
- nearly half of all respondents do not believe that the EU will continue to exist in its current form in five years’ time.
“For companies this is a two to three-year project with the potential that you could get 90% down the line and find that you don’t need it, which would be a bitter pill to swallow,” added Mr Butler. “The fact is there is not enough time to sit on the fence and then follow the market, but there is also not enough certainty.”
Mr Barnes said the issue was just as pressing for European insurers who currently operate through branches in the UK.
“They will have a similar issue as they may need to gain authorisation from the PRA for the branch or a new subsidiary company,” he explained. “The UK has implemented a gold-plated version of Solvency II and there is no likelihood that will be relaxed post Brexit. This may cause issues for European insurers in terms of the requirements of the PRA for authorisation.”