Insurance Regulatory eBulletin - Brexit

PRA confirms UK transition arrangements – PS4/18 and SS2/18
On 28 March, the PRA published a Dear CEO letter from Sam Woods, Deputy Governor, Prudential Regulation and CEO, Prudential Regulation Authority following the announcement of the agreement between the UK and EU27 that there should be an implementation period until the end of 2020 as part of the UK’s Withdrawal Agreement with the EU. The letter reiterates that the foundation of the Bank of England’s approach to preparations for EU withdrawal remains the presumption that there will continue to be a high degree of supervisory cooperation between the UK and the EU.

The PRA also issued a related Policy Statement (PS4/18) and a Supervisory Statement (SS2/18) on the PRA’s approach to branch authorisation and supervision. The PS provides feedback to responses to Consultation Paper (CP) 30/17 ‘International insurers: the Prudential Regulation Authority’s approach to branch authorisation and supervision’.

SS2/18 introduces new factors to be considered alongside the PRA’s current requirements for third-country branch authorisation. In particular, the SS sets out the PRA’s expectations on when a subsidiary would be more appropriate than a branch for a third-country insurer wishing to carry out insurance business in the UK. SS44/15 ‘Solvency II: third-country insurance and reinsurance branches’ remains unchanged. One material change has been made to the draft supervisory statement following the consultation, which is to increase the FSCS-protected liabilities threshold from £200 million to £500 million.

The SS is relevant to all existing and prospective insurance firms carrying out regulated activities but not headquartered in the UK that are not able to benefit from passporting rights. The new SS does not apply to Swiss General Insurers.

FCA statement on EU withdrawal
On 28 March, the FCA issued a statement welcoming the agreement reached on the terms of an implementation period that will apply following the UK’s withdrawal from the EU.

The statement notes that the implementation period is intended to operate from 29 March 2019 until the end of December 2020, during which time EU law would remain applicable in the UK, in accordance with the withdrawal agreement. Firms and funds will therefore continue to benefit from passporting between the UK and EEA during this period. Obligations derived from EU law would continue to apply and firms must continue with implementation plans for EU legislation that is still to come into effect before the end of December 2020. Consumer rights and protections derived from EU law would also continue to apply.

The statement confirms that, in this light and also the UK government’s commitment to a temporary permissions regime, firms and funds currently benefiting from an EU passport need not apply for authorisation at this stage.

In a speech given at the Annual Dinner of the All Party Parliamentary Group on Wholesale Financial Services on 27 March, Andrew Bailey, Chief Executive of the FCA, noted that the agreement does not provide an answer to the continuing key financial stability risk which is both systemic and symmetric. This risk is the certainty of contractual obligations post UK withdrawal which might affect all financial industry contracts requiring cross-border performance of a regulated activity, but whose impact is expected to be greatest for insurance policies and derivative products. However, the negotiation of the implementation period gives further time for a solution to a risk ‘which is now well understood’.