Brexit and securing the passport

For insurers operating in London or the UK, as part of a wider European business strategy, the passporting implications of Brexit are significant.

Insurers need to understand what the implications are for their business either losing or maintaining passporting rights from the UK into the EEA (and vice versa). They need to consider how they can best structure their businesses to preserve passporting rights within the EEA, if that is important to them. Finally, they need to consider whether they can afford to wait before acting, given the uncertainties surrounding what the UK’s eventual access to the single market will be and how long that will take to be established.

Passporting rights and Brexit

A passport is a mechanism through which financial services firms, including insurance companies, may exercise (i) the right to provide services and (ii) the right to establishment across the EU and in some cases the European Economic Area (EEA). An entity’s authorisation to do business in one EU Member State is recognised by all other Member States as an authorisation to do business in their territory as well. The passport therefore removes the need to obtain separate authorisation from every one of the other Member States.

Collectively, the directives that create the passporting rights cover the roles of the host and home state regulators in cross-border business, providing a framework for cooperation between regulators in a range of areas. Solvency II Directive (2009/138/EC) is the example of primary relevance to EU insurers.

Many firms hold more than one passport and there are more passports than firms. In a recent letter to the Treasury Select Committee, Andrew Bailey, CEO of the Financial Conduct Authority (FCA), stated that 5,476 firms use UK authorised “outbound” passports to do business in the EEA while 8,008 firms use “inbound” passports issued in other EEA states to do business in the UK. For insurance, the number of passports under Solvency II was 220 outbound and 726 inbound, while under the Insurance Mediation Directive the numbers were 2,758 and 5,727, respectively.

Passporting has been widely regarded as a major benefit of the UK’s membership of the EU. It allowed UK-regulated businesses (regardless of national origin) the ability to offer services remotely to over 500 million customers without maintaining a permanent presence in each Member State, reduced the cost and complexity of maintaining offices across multiple Member States (where needed) and enhanced London’s status as the pre-eminent financial centre in the EU.

How Brexit will impact passporting rights is subject to two major uncertainties: (i) what relationship the UK will negotiate with the EU on leaving and (ii) how long that process will take. 

What a unique relationship for the UK with the EU might look like and what elements might be the most difficult to negotiate, is already subject to widespread commentary. At the crux of negotiations is likely to be whether it is possible for the UK to have an element of control over immigration of peoples from EEA states.

It is possible that the UK’s eventual relationship with the EU will preserve the passports, for example, if the UK negotiates European Free Trade Association (EFTA) membership and remains in the EEA. However, it is possible that it will not. A tension exists between seeking to limit the free movement of people, likely to be a negotiating imperative for the UK government, and seeking to maintain access to the single market, of which the free movement of people is regarded as a vital principle by other Member States.

In that context, insurers to whom the passport matters - because they cross-sell into the EEA or have significant branch operations in EEA states - have been looking closely at their options since the referendum (if not before).

High-level pointers in preserving passports

The only way for an insurer to be confident that it will enjoy the right to operate in or cross-sell services into the EEA on a passport basis once the UK has left the EU is, before that date, to have a group company authorised in a different EEA state and capable of carrying out the appropriate activities. If the insurer’s group does not currently include such an entity, it will need one. Options include:

  • Incorporating and obtaining authorisation for, from scratch, a new company in a different EEA state.
  • Acquiring an existing insurance company that has the necessary authorisation in an EEA state.
  • Converting a UK plc into a Societas European (a public company registered in accordance with the corporate law of the EU), re-domicile the SE into an EEA state and then obtain authorisation.

Each insurer may wish to consider its structuring more generally, including whether to retain EU or UK operations at all, and if so, whether to merge UK operations into the EEA entity and whether to transfer all or part of the UK entities’ rights and liabilities to the EEA entity under the relevant legislation.

The options for each insurer will depend on its current operations and strategy. Choice of where to be domiciled in the EEA is likely to involve consideration of a range of factors. These factors include the experience of the local regulator (who until the question of whether the UK will retain passporting rights is clearer may not welcome ‘speculative’ applications for authorisation), language issues, the availability of a suitably skilled workforce, the ease of moving existing staff from London and so on.

The UK and London are significant insurance markets and many insurers will wish to retain significant UK operations in addition to EEA-based operations. A further important issue will be whether, should the UK exit the passporting regime, it will be granted provisional or formal equivalence under Solvency II. Assuming the UK were to be granted full equivalence as a third country, EEA-based insurers would be able to operate in UK branches relatively easily, subject to needing to obtain separate UK authorisation.

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