Both the EU and the UK committed to establishing a Memorandum of Understanding by 31 March 2021, for establishing a framework for Regulatory Cooperation on financial services. As the new framework focuses on cooperation and is specifically without prejudice to the “unilateral and autonomous decision making of each side”, firms should not expect it to create material changes to everyday post-Brexit business arrangements between the UK and EU states.
With financial services getting very little attention in the post-Brexit deal, relevant provisions for the insurance sector can be found in Part 2 of the TCA, Title II on Services and Investment. So far the provisions reflect mostly a “commitment to establish a favourable climate for the development of trade and investment between them” that might be seen as a basis for negotiation of further agreements.
Overall, the TCA’s approach to financial services is reflective of World Trade Organization (WTO) rules, applying the concepts of ‘national treatment’ and ‘most favoured nation treatment’. This means that each party has to allow services, service suppliers, investors and their enterprises operation in its territory on a non-discriminatory basis, compared to their own or other third party providers.
Businesses wishing to provide cross-border financial services between the UK and EU states (in either direction) need to understand the local regulatory environment in which they are operating, in a way that was largely unnecessary under the passporting regime. This may include requirements for local authorisation and a degree of substance that was previously not even considered for other EU jurisdictions.
The Temporary Permissions Regime in the UK gives EU businesses operating in the UK time to resolve this issue, but similar regimes in the EEA states are inconsistent. UK businesses that rely significantly on access to the EU market will most likely have had the time and inclination to put arrangements in place to transfer portfolios accordingly.
However UK firms with a smaller part of their business based in the EU that have not focused on post-Brexit requirements or firms looking to enter the EU market, need to be wary of simply continuing as before. Local rules may require local authorisation for activity previously covered by a UK authorisation and as such, we would expect a greater regulatory focus on UK firms’ activity in EU states than was previously the case.
EU financial services legislation such as MiFID II, contain mechanisms allowing financial institutions based in third countries to gain access to EEA markets, provided that the third country's regulatory regime has been deemed to be equivalent to that of the EU. However, for deposit-taking, lending, mortgage lending, insurance and insurance mediation, and activities relating to Undertakings for the Collective Investment in Transferable Securities (UCITS), the equivalence mechanism is not available.
Seeking a determination of equivalence from the European Commission is a possibility to gain unfettered access to the EEA market, and negotiations to that effect are underway. It is however, at the discretion of the Commission to determine whether a third country is ‘equivalent’, which in practice will mean that political considerations affect the outcome of any determination and its timings. Also, the Commission can withdraw their equivalence decision should they wish to do so.
Potential D&O liability is likely to remain of interest. Directors may be vulnerable to claims if they have not planned appropriately for Brexit, and incurred losses as a result. Senior-level management must properly investigate their business risks and disclose them to their brokers. Care should be taken with policy renewals and D&O policy wording, as failure to present a risk fairly at renewal can lead to insurers refusing to cover claims later.
While the TCA provides some measure of certainty for political risk and trade credit insurers, the COVID-19 pandemic’s economic and social impact remains front and centre and will continue to complicate global trade and an already volatile political risk landscape.