Court of Appeal Clarifies Approach to Interpretation of EU Retained Law

A recent decision of the Court of Appeal has clarified the approach that English courts should take to retained EU law following the UK’s withdrawal from the EU.  The case concerned the interpretation of an EU regulation which until 31 December 2020 (“IP completion day“) had direct effect in the UK but which now applies in the UK by virtue of the European Union (Withdrawal) Act 2018 (“EUWA“).

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Beyond Brexit – what now for insurers’ legacy business?

As expected, the terms of the trade deal agreed between the UK and the EU on 24 December 2020 mean that Solvency II passporting rights are no longer available to UK insurers wishing to conduct insurance business in the EEA.

For UK insurers with policyholders in EEA States, this creates a particular concern that they will no longer be licensed to service those policies, including paying claims, unless they have established an authorised branch in each country. An alternative approach, and that which has been adopted by many insurers, has been to transfer the policies to an EEA carrier.

Post-Brexit, the risk to EEA policyholders of being unable to claim under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

Summary

In our view, the argument that “expat business” (i.e. policies that were sold in the UK to policyholders who subsequently move to the EEA) is not cross-border business, and so is not affected by loss of passporting rights remains a valid one. This means that an EEA authorisation should not be required to continue servicing this type of policy.

However, it is also important to understand that EIOPA’s February 2019 recommendations to the insurance sector on Brexit (see our blog post for discussion) are not binding. Individual states are free, therefore, to apply the rules differently, to the extent that it is possible to diverge from other states under EU law. For example, our blog post dated 15 November 2019 describes the approach taken by France to the post-Brexit servicing of policies held by UK expats.

Finally, a number of EEA States have introduced run-off regimes to mitigate the impact of UK insurers’ loss of passporting rights from the end of the transition period. Each state’s regime is different, though, requiring specific legal advice to be taken in each case as to their effect.

EIOPA recommendations – February 2019

EIOPA’s Brexit recommendations contained the following guidance on legacy business:

  • EEA States were encouraged to apply a mechanism for the run-off of EEA business by UK insurers who lose their passporting rights or require those insurers to take immediate steps to become authorised.
  • EEA States were also encouraged to recognise that, whilst UK insurers should not be able to write new business (including any renewals, extension or increase of cover) without obtaining a suitable EEA authorisation, policyholders who exercise an option or right in an existing policy to start taking their pension should not be prejudiced.
  • Where a policyholder is habitually resident in the UK at the date of entering into a life insurance contract but moves to the EEA afterwards, national authorities should take this into account in their supervisory review.
  • National authorities should take the same approach to those classes of non-life business where the risk is treated by Solvency II as situated in the state of an individual’s habitual residence (or the state of a legal person’s establishment).

The recommendations suggested that a distinction should be drawn between legacy business that was written from the outset on a cross-border basis (“cross-border business”) and expat business.

 Expat business

It is implicit in EIOPA’s recommendations that it takes the view that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts and does not change if a policyholder subsequently moves his habitual residence (or establishment) from the UK to an EEA State. Applying this approach, a UK insurer that continues to pay claims after a UK policyholder relocates from the UK to an EEA State is not carrying on cross-border business and, under the pre-Brexit regime, did not rely on passporting rights to make those payments. Post-Brexit, the same insurer should, therefore, be able to continue to pay claims into that EEA jurisdiction without needing to obtain a local authorisation.

Equally, a UK insurer that meets its obligations to expat policyholders who exercise an option existing under their policy e.g. to exercise drawdown rights should not require an EEA authorisation to do so.

In our experience, most, if not all, UK insurers take the same view on this as EIOPA. They have not, as a consequence, included policies held by UK expats in Brexit-driven Part VII schemes transferring policies to an EEA carrier. The same issue arises, of course, in relation to moves by UK policyholders to non-EEA countries and it would certainly come as a surprise to UK insurers to find that they were unable to continue paying claims in those cases.

Cross-border business

By contrast, EIOPA’s recommendations suggest that the servicing of policies that were written before Brexit on a cross-border basis will require an EEA authorisation to replace passporting rights that are currently relied upon. In practice, consistent with this view, we understand that most policies in this second category have been transferred to an EEA insurer before the transition period came to an end on 31 December 2020.

Where a Part VII transfer completed before the end of the transition period, a UK insurer has no need to rely on any of the run-off regimes that have been put in place by a number of EEA states. The transitional relief provided by these regimes may, however, be important for:

  • firms who have begun the Part VII process but not completed the transfer of policies before 31 December 2020; and
  • firms who have decided not to transfer their cross-border business to an EEA-authorised insurer, perhaps because there are very few of these policies involved or the policies have a very short tail.

One remaining concern, though, is that firms falling into these two categories may end up with a “gap” in authorisation arising from the limited nature of the run-off regimes established by EEA authorities.

PRA guidance – February 2020

In February 2020, the PRA published guidance for UK insurers on their ability to service EEA liabilities once the Brexit transition period came to an end on 31 December 2020. In our view, the guidance is consistent with the view that expat business can continue to be serviced from the UK without an EEA authorisation.

However, the PRA did warn firms that do need an EEA authorisation to service their cross-border business that run-off regimes established by a number of EU authorities to ensure ongoing service continuity in relation to EU liabilities in a “no deal, no transition” scenario may not also apply from the end of the transition period. Firms who were intending to rely on those transitional regimes (as a temporary or permanent solution) were, therefore, advised to undertake a thorough analysis of their expected run-off profile, and to discuss their proposed approach with the relevant EU authorities. (The letter expressly referred to EU authorities and EU liabilities but should, in our view, have applied more widely to EEA authorities and EEA liabilities, consistent with the scope of the Solvency II regime.)

In practice, a number of EEA States have introduced run-off regimes to enable UK insurers to continue paying claims now that the transition period has come to an end. In Ireland, for example, UK insurers and intermediaries that satisfy conditions for entering into its temporary run-off regime are permitted to service their existing portfolio of contracts for a maximum of 15 years. The equivalent regime in Italy is not time-limited.

FCA guidance – December 2020

More recent FCA guidance for life companies and for general insurers (again issued before the end of the transition period) noted the approach taken by EIOPA to expat business but recognised that EIOPA’s recommendations were not binding on EU states. The FCA urged UK insurers with legacy business to engage with relevant national regulators whilst being guided in their decision-making by the need to secure appropriate outcomes for consumers.

It is far from clear what an insurer should do if regulation and customer interests conflict although the FCA’s comment that it would be “a bad outcome for a consumer not to receive the payment of a valid claim or any other payments they’re entitled to” suggests that firms must find a way of fulfilling their obligations to policyholders if at all possible. Other options for firms include compensating policyholders for the loss of benefits caused by local law restrictions or removing exit charges if a policyholder chooses to end the policy because of limitations e.g. on exercising rights or options.

For new business written after the end of the transition period, the FCA suggested that firms may need to spell out any limitations of the contract at sale.   This may include making it clear to new policyholders that moving to the EEA may affect their ability to benefit fully from their cover albeit that the position may change from state to state. For example, customers in some EEA states may lose the benefit of rights or options under their contract because an insurer lacks a local authorization.

What is clear in relation to both legacy and new business is that firms need to communicate with customers and keep them informed of any new developments that may affect their enjoyment of their policies.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

FCA consults on approach to authorising international firms

The FCA has published a consultation paper (CP20/20) describing its approach to the authorisation of international firms.  In the context of Brexit, the FCA’s comments will be relevant to firms (including insurers and insurance intermediaries) who have established EEA hubs to mitigate the loss of passporting rights, while continuing to conduct some of their activities through a UK branch.  In most cases at least, these firms will maintain their authorisation in the UK from the end of the Brexit implementation period by entering the Temporary Permissions Regime.  After that, they will require full authorisation in the UK which will bring the FCA’s guidance into play.

Key points for firms include:

  • UK presence: The FCA expects firms to have an establishment or physical presence in the UK (i.e. a UK “branch”).  This will, of course, be a relevant consideration for EEA firms that currently operate on a services-only basis in the UK but whose activities in the UK nonetheless will require authorisation once passporting rights fall away.  The need for a UK branch is, of course, consistent with the practice adopted by the PRA to international insurers.
  • Branch vs subsidiary: The FCA will be looking to see how firms mitigate heightened risks that come with conducting business through a UK branch, as compared with establishing a UK-incorporated subsidiary. We can expect the FCA to put pressure on an international firm to convert its branch to a subsidiary where it believes that operating through the branch poses an unacceptable level of risk.  Again, of course, this would be consistent with the approach that has already been taken by the PRA to insurers.
  • Cross-border services:  In assessing the risks of harm, the FCA will look at both (a) risks associated with activities being undertaken through a branch, for example, because it is more difficult for the FCA to take action or because of overlapping regulatory regimes in the home state and the UK; and (b) the nature and scale of activities the international firm intends to conduct from outside the UK which may raise different concerns e.g. FSCS cover may not be available.
  • Risks of harm: Three broad categories of harm identified in the paper are retail harm, client asset harm and wholesale harm, although the FCA will also consider sector and business specific risks as part of its assessment. The FCA will also consider home state regulation and supervision, together with international co-operation.
  • Limitations and requirements: The FCA may impose limitations or requirements as part of any approval given to an international firm if it believes it necessary to ensure that the firm will meet conditions for authorisation on an ongoing basis.  For example, it may limit the number or category of customers a firm can deal with.

Our longer briefing on CP20/20 can be found here.

The consultation will be of particular interest to insurance intermediaries that are only regulated by the FCA in the UK.  For insurers, the FCA’s comments supplement PRA guidance already issued on this topic (see SS44/15 and SS2/18).  The deadline for commenting on CP20/20 is 27 November 2020.

Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

 

 

 

Upcoming webinar: Financial services – Update and preparations for no-deal

With UK/EU deal negotiations in the balance and a no-deal scenario still possible, a panel of experts from Herbert Smith Freehills, the Financial Conduct Authority and McCann FitzGerald (for the Ireland perspective) will review the current state of play on Brexit and what comes next for the regulation of cross-border financial services.

The webinar will take place between 2-3pm on 23 July 2020. Topics covered will include:

  1. Free trade agreement negotiations and equivalence assessments: stocktake
  2. UK and EU – no deal impact:
    • Equivalence and cooperation agreements
    • Position for EU27 firms and UK  – TPR, temporary transitional powers
    • Position for UK firms and EU27
    • FCA expectations for firms
  3. Ireland:
    • Position for UK firms operating in Ireland
    • Concerns for Irish firms in UK market
  4. What firms should be doing next

WHAT DO I DO IF I AM INTERESTED?

REGISTER – Please register here. We will then send you an email with a link to join the webinar and confirmation of your log-in address.

If you have queries about the webinars or the registration process please contact webinars@hsf.com.

UNABLE TO ATTEND ON THE DAY?

Please note this webinar will be delivered in a live format only and will not be available on demand.

If you would like to keep up-to-date with our latest Brexit analysis, please subscribe here to our Beyond Brexit blog.

Speakers:

Greg Sachrajda – Head of International Delivery, Financial Conduct Authority 
Zertasha Malik – Head of International, Financial Conduct Authority
Darragh Murphy – Partner, Financial Services Regulation, McCann FitzGerald
Clive Cunningham – Partner, Financial Services Regulation, Herbert Smith Freehills
Lode Van Den Hende – Partner, Competition, Regulation and Trade, Herbert Smith Freehills
Katherine Dillon – Of Counsel, Financial Services Regulation, Herbert Smith Freehills
Emma Reid – Associate, Financial Services Regulation, Herbert Smith Freehills

Brexit – PRA issues guidance to insurers with legacy business

The PRA has published guidance for UK insurers on their ability to service EEA liabilities once the Brexit transition period (called the “implementation period” in UK legislation) comes to an end on 31 December 2020.

In our view, the guidance is consistent with the view that “expat business” (where policies were written in the UK but the policyholder subsequently moved to the EEA) can continue to be serviced from the UK without an EEA authorisation. It does, however, highlight some important points for firms that do need an EEA authorisation to service their cross-border business (i.e. policies where the risk/commitment was situated in an EEA State at inception) once the transition period ends and passporting rights fall away.

Key points for firms are as follows:

  • Run-off regimes established by various EEA States to mitigate the impact of a “no deal, no transition” Brexit may not apply from the end of the transition period following the UK’s EU exit on terms agreed in the Withdrawal Agreement.
  • UK insurers intending to rely on those regimes, as a permanent or temporary measure, should take steps to address this risk, including contacting relevant EEA authorities.
  • The PRA will not guarantee that Part VII transfers of policies to EEA-authorised insurers will be effective before the end of the transition period.

Firms must confirm to their PRA supervisor that they have engaged with all relevant EEA authorities by Thursday, 30 April 2020.

The problem

Given that any future trade deal which is agreed by the EU and the UK before the end of the transition period is unlikely to address ongoing passporting rights, UK insurers need to be prepared for the loss of those rights from the end of 2020.

For UK insurers with policyholders in EEA States, this creates a particular risk that they will no longer be licensed to service those policies, including paying claims, unless they go through the onerous process of establishing an authorised branch in each country. An alternative approach, adopted by many insurers, is to transfer the policies to an EEA carrier.

The risk to EEA policyholders of being unable to claim, post-Brexit, under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

EIOPA recommendations – February 2019

EIOPA recommendations published in February 2019 provided some helpful guidance (see our blog post dated 21 February 2019 for discussion). In summary:

  • EEA States were encouraged to apply a mechanism for the run-off of EEA business by UK insurers who lose their authorisation or to require those insurers to take immediate steps to become authorised.
  • EEA States were also encouraged to recognise that, whilst UK insurers should not be able to write new business (including any renewals, extension or increase of cover) without obtaining a suitable EEA authorisation, policyholders who exercise an option or right in an existing policy to start taking their pension should not be prejudiced.
  • Where a policyholder is habitually resident in the UK at the date of entering into a life insurance contract but moves to the EEA afterwards, national authorities should take this into account in their supervisory review.
  • National authorities should take the same approach to those classes of non-life business where the risk is treated by Solvency II as situated in the state of an individual’s habitual residence (or the state of a legal person’s establishment).

These recommendations suggest that a distinction should be drawn between legacy business that was written from the outset on a cross-border basis (“cross-border business”) and policies that were sold in the UK to policyholders who subsequently move to the EEA (described above as “expat business”).

Expat business

It is implicit in EIOPA’s recommendations that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts and does not change if a policyholder subsequently moves his habitual residence (or establishment) from the UK to an EEA State. Applying this approach, a UK insurer that continues to pay claims after a UK policyholder relocates from the UK to an EEA State is not carrying on cross-border business and (currently) does not rely on passporting rights to make those payments. Post-Brexit, the same insurer should, therefore, be able to continue to pay claims into that EEA jurisdiction without needing to obtain a local authorisation.

Equally, a UK insurer that meets its obligations to expat policyholders who exercise an option existing under their policy e.g. to exercise drawdown rights should not require an EEA authorisation to do so.

In our experience, most, if not all, UK insurers take the same view on this as EIOPA. They have not, as a consequence, included policies held by UK expats in any Brexit-related Part VII schemes transferring policies to an EEA carrier.

Cross-border business

By contrast, EIOPA’s recommendations suggest that the servicing of policies that were written before Brexit on a cross-border basis will require an EEA authorisation to replace passporting rights that are currently relied upon. In practice, consistent with this view, we understand that most policies in this second category have been, or are being, transferred to an EEA insurer before the transition period comes to an end.

Where a Part VII transfer completes before the end of the transition period, a UK insurer has no need to rely on any of the run-off regimes that were put in place by a number of EEA states in the lead-up to the UK leaving the EU. The transitional relief provided by these regimes may, however, be important for:

  • firms who have begun the Part VII process but not completed the transfer of policies before 31 December 2020; and
  • firms who have decided not to transfer their cross-border business to an EEA-authorised insurer, perhaps because the policies have a very short tail.

The immediate concern for the PRA appears to be that firms falling into these two categories will end up with a “gap” in authorisation arising from the limited nature of the run-off regimes established by EEA authorities to date.

PRA guidance – February 2020

On 28 February 2020, the PRA published a template version of a letter from Anna Sweeney, Executive Director of Insurance Supervision, to PRA-regulated insurance firms with outstanding EU liabilities following the UK’s withdrawal from the EU. The letter warns that run-off regimes established by a number of EU authorities to ensure ongoing service continuity in relation to EU liabilities in a “no deal, no transition” scenario may not automatically apply from the end of the transition period. Firms who are intending to rely on those transitional regimes (as a temporary or permanent solution) are, therefore, advised to undertake a thorough analysis of their expected run-off profile, and to discuss their proposed approach with the relevant EU authorities. (The letter expressly refers to EU authorities and EU liabilities but should, in our view, be assumed to apply more widely to EEA authorities and EEA liabilities, consistent with the scope of the Solvency II regime.)

For firms seeking to transfer their EU liabilities to an EU-authorised insurer, the PRA has also said that it cannot guarantee that any Part VII transfer will be sanctioned by the Court or that it will be sanctioned within firms’ intended timeframes. Again, the PRA recommends that firms proactively contact the relevant EU authorities to ensure that contingency plans, and any associated risks, remain satisfactory to them.

Insurers are advised that they should have obtained appropriate legal advice when finalising their contingency plans. Further, their plans should have been discussed and approved at an appropriate level within each firm. Clearly, the consequences that may flow from conducting business in an EEA jurisdiction without the necessary authorisation support the need for Brexit contingency plans, and risks associated with their implementation, to be fully understood by senior management.

The PRA expects firms to confirm that they have engaged with all relevant EEA authorities by Thursday, 30 April 2020. The PRA has also indicated its willingness to discuss the issues raised by its letter further.

Summary

In summary, run-off regimes established by EU authorities to mitigate the impact of a “no deal, no transition” Brexit may not also apply from the end of the transition period. UK insurers intending to rely on these regimes, either temporarily while they complete a transfer of their EEA liabilities to an EEA-authorised firm or permanently until their EEA liabilities have all been extinguished, will need to check that they will hold the authorisations needed to service their EEA liabilities from the end of the year. In our view, however, the view that “expat business” is not cross-border business remains a valid one, which means that an EEA authorisation should not be required to continue servicing this type of policy.

Other important points are that, to the extent that EEA states do decide to introduce run-off regimes for cross-border business, they are all likely to be different, requiring specific legal advice to be taken in each case as to their effect. Further, EIOPA’s February 2019 recommendations are not binding, leaving it open to individual states to apply the rules differently, to the extent that it is possible to diverge from other states under EU law. For example, see our blog post dated 15 November 2019, describing the approach taken by France to the post-Brexit servicing of policies held by UK expats.

If you would like to discuss arrangements for support on any of the issues raised by this article, please do ask your regular Herbert Smith Freehills relationship contacts, or one of the following members of our insurance team.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

New Brexit Legal Guide section available: Insurance

The updated Insurance section of our Brexit Legal Guide is now available.

This provides a useful overview, amongst other things, of whether the end of the transition period:

  • requires incoming EEA (re)insurers and (re)insurance intermediaries to apply for, and obtain, full authorisation for their UK operations;
  • will impact UK firms wishing to conduct activities in other jurisdictions without the benefit of passporting rights; and
  • will result in the UK’s regulation of (re)insurers following Solvency II closely or departing from its standards.

If you would like to discuss specific arrangements for support on any of the issues covered by the guide, please do ask your regular Herbert Smith Freehills relationship contacts, or otherwise any of our experts listed here.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

France sets out approach to post-Brexit servicing of policies held by UK expats

In February 2019, EIOPA published a series of recommendations (the “Recommendations“) for the insurance sector relating to the UK’s withdrawal from the EU (see our earlier blog post here).

The French regulator, the Autorité de contrôle prudentiel et de resolution (“ACPR“), has indicated that it does not intend to comply with Recommendation 6, relating to insurance policies sold in the UK by UK insurers to policyholders who have since relocated to an EEA state (“UK expats“).

UK insurers needing to service policies held by UK expats living in France post-Brexit should consider the ACPR announcement carefully. Some may need to secure passporting rights into France before the UK leaves the EU.

Background – Solvency II and third country firms

As widely discussed over the past few years, a risk associated with the UK’s withdrawal from the EU is that UK insurers with policyholders in EEA states will not be able to service those policies post-Brexit unless they have established an authorised branch in each country (or unless the policies have been transferred by the time of Brexit to an EEA carrier). This is because, whilst Article 162 of the Solvency II Directive provides for the authorisation of EEA branches of third country insurers, it is silent on how cross-border services business (often referred to as “non-admitted” insurance) from a third country (including the UK post-Brexit) should be treated and there is no consistent approach.

As the possibility of a country leaving the EU has not previously been seen as something for which extensive provision needs to be made in European legislation, little attention has been given to such differences. However, the risk to EEA policyholders of being unable to claim, post-Brexit, under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

What has EIOPA said?

Under the Solvency II regime, cross-border insurance services are provided where an insurer established in one EEA state covers risks or commitments located in another EEA state.

Recommendation 6 (Change in the habitual residence or establishment of the policyholder) reads as follows:

23. Where a policyholder with habitual residence or, in the case of a legal person, place of establishment in the UK concluded a life insurance contract with a UK insurance undertaking and afterwards the policyholder changed its habitual residence or place of establishment to a EU27 Member State, competent authorities should take into account in the supervisory review that the insurance contract was concluded in the UK and the UK insurance undertaking did not provide cross-border services for the EU27 for this contract.

24. Competent authorities should apply the same approach to non-life insurance contracts that do not relate to buildings or to buildings and their contents or to vehicles.

In summary, EIOPA takes the view that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts. It does not change, therefore, if a policyholder moves his habitual residence (or establishment) from the UK to France (or any other EEA state) after the policy has been taken out.

Applying this approach, a UK insurer that continues to pay claims today after a UK policyholder has relocated to another EEA state will not be carrying on cross-border business and does not rely on passporting rights to make those payments. Post-Brexit, that insurer should also be able to continue to pay claims into France, say, without needing to obtain a local authorisation to replace lost passporting rights.

In our experience, most, if not all, UK insurers take the same view on this as EIOPA. They have not, as a consequence, included policies held by UK expats in any Brexit-related Part VII schemes transferring policies to an EEA carrier.

What has the ACPR said?

In a statement published on its website on 8 November 2019, the ACPR stated that French law requires it to conclude that the state of the risk/commitment would move with a UK policyholder to France on a change of habitual residence or establishment (as the case may be). For a UK insurer to service that policy it would, therefore, need to have regulatory permission to conduct insurance business in France. Pre-Brexit, passporting rights held by the UK insurer would be sufficient. Post-Brexit, regulatory permission to conduct business in France would be needed.

If the ACPR’s announcement had stopped here, UK insurers needing to service policies held by UK expats post-Brexit would have been placed in an extremely difficult position. Helpfully, however, transitional rules aimed at ensuring that Brexit does not interrupt the payment of claims by UK insurers to policyholders in France appear to provide a solution.

In brief, French legislation (known as the Brexit Ordinance) allows UK insurers to perform their obligations under contracts written before Brexit, including under contracts written with UK expats, provided that, on the date the UK leaves the EU, the insurer holds passporting rights to operate in France.

ACPR has also confirmed that the Brexit Ordinance will not apply to renewals or to contracts providing for the payment of new premiums. This does not, however, prohibit the payment of “mandatory premiums” payable by the policyholder under the contract.

What has the PRA said?

On 12 November 2019, the PRA published a statement highlighting the ACPR’s comments. It encouraged firms to seek legal advice and consider any risk arising from the ACPR approach to affected policyholders as soon as possible. Specifically, firms should consider the need to secure passporting rights before exit day to ensure that they could can meet their obligations to UK expats post-Brexit by relying on the Brexit Ordinance.

Our view

The extension of run-off rights under the Brexit Ordinance to contracts held by UK expats with UK insurers is welcome. Without this concession, many UK insurers without a French branch would be concerned that they could not pay claims to UK expats, including those moving to France after Brexit, without breaking French law.

The impact of the ACPR’s comments on renewals and the payment of additional premium is likely to vary by type of policy. In the case of general insurance, UK firms should be able to take advantage of the Brexit Ordinance, at least until they renew (usually annually). In the case of long term business, annuity policies in payment at the time of Brexit and that have been secured by the payment of a single premium, should fall within France’s run-off regime. Drawdown and protection policies should also be able to benefit.

More difficult, perhaps, are long term savings contracts, such as pensions. Whilst, in a sense, no premium is ever mandatory as a policyholder can always lapse the policy, and firms should take advice, we expect that in context this must mean a payment of premium which is mandatory if the cover is to be maintained.

The ACPR comments that its approach to this issue is mandated by French case law and regulation. We would question whether the domestic law of any EEA state, rather than EU law, should determine the state of the risk or commitment under an insurance policy for the purposes of Solvency II rules on passporting.

Firms that need to rely on the Brexit Ordinance to meet their obligations to UK expats in France will need to ensure that they hold passporting rights into France at the date of the UK’s withdrawal from the EU (currently due to be 31 January 2020). Some insurers will already hold those passporting rights and need take no further action. Others, who have probably never sought to make sales into France, may need to secure their passporting rights before the UK leaves the EU. It is important that they do so. There is no de minimis threshold for the application of the French regime which means that the relocation of a UK policyholder to France (before or after Brexit) could put a UK insurer in breach of French law if it has not taken steps to obtain passporting rights before Brexit.

 

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2067
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Senior Associate, London
+44 20 7466 2158

Updated Brexit Legal Guide launched

We released the latest version of our Brexit Legal Guide yesterday. Below is a message from our Chair and Senior Partner, James Palmer, which accompanied the updated guide.

Dear clients and professional colleagues,

The outcome of the June 2016 UK referendum on EU membership ushered in a period of increasing political turmoil in the UK. When I wrote an introduction to the first edition of this legal guide my colleagues and I had a clear view that leaving the EU would take far longer and be far more complex than most other commentators were saying, but I did not anticipate then that over three years later we would have so little clarity on the UK and EU’s long term relationship with each other.  Nor that polarisation of views on all sides would have increased still further, leading to political deadlock. This updated Brexit Legal Guide addresses the legal position if the UK leaves the EU with or without a deal and picks out the key pieces of legislation that will soon be in force if the UK leaves the EU without a deal.  I hope you will find it useful.

Throughout the Brexit process our team at Herbert Smith Freehills have worked across our firm to help clients in all markets and parts of the world in preparing for this major change.  For those who had to make significant changes in order to continue to carry on business in the EU, particularly financial institutions, many of these changes were made in time for the original leaving date of March 29th this year.  Across a range of sectors, clients have set up new subsidiaries, acquired new regulatory approvals in the EU or the UK, prepared for changed distribution channels and sought to protect their people working across countries. For businesses that trade in goods between the UK and the EU, however, although careful plans have been laid, the time of testing will not come until the rules at the frontiers and within the EU and the UK actually change – this could be at the end of next month or potentially as late as the end of 2022.

At the time of writing, the Government in the UK has lost its parliamentary majority and Brexit is dominating the political context, driving out other factors which of course may also be relevant if, as seems likely, a general election is held within the next couple of months.  The political situation is so fluid that anything I say about the options to resolve the crisis, and how they may affect the timing and nature of Brexit,  is likely to be out of date by the time this message goes out.  We are all experiencing unusually uncertain times.

What I can say, is that we have worked in depth across our practice from offices across Europe, Asia and around the world, as well as from the UK, to help clients across sectors on a wide range of Brexit issues since before the 2016 referendum.  Our differentiating expertise has been recognised both by external commentators and by our close involvement in working with governments and regulators to develop solutions to Brexit related challenges for businesses.  Our long tradition of involvement at the interface of law and public policy development is one to which we remain committed.

If you would like to discuss specific arrangements for support through the risk of a no-deal exit or on dispute risks that may arise, or on any other questions or challenges you have, please do contact your regular Herbert Smith Freehills relationship contacts, or otherwise any of our experts listed here.

Yours faithfully,

James Palmer

James Palmer
James Palmer
Chair and Senior Partner
44 20 7466 2327

Regulators extend transitional direction powers in line with Brexit delay

The FCA, Bank of England (“BoE”) and PRA yesterday announced measures to extend certain UK-specific Brexit transitional relief provisions for a further six months until 31 December 2020, in line with the extension of Exit Day until 31 October. This is generally in line with industry expectations and does not signal any material changes to the regulators’ policy or approach. (It should be noted that these timelines are separate from the 3-year maximum period applicable under the (separate) Temporary Permissions Regime (“TPR”), which remains unchanged in terms of overall maximum duration).

The FCA has issued a statement confirming its intention to extend the proposed duration of the directions issued under its temporary transitional power (“TTP”) to 31 December 2020, reflecting the six-month extension of Article 50. The TTP is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. For those areas covered by the TTP, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

The FCA’s statement clarifies that, other than the additional time, the FCA’s approach to the use of the TTP remains unchanged from that previously communicated. Firms are reminded, in particular, that certain obligations will not be covered by the TTP: these include some significant areas such as reporting under EMIR and the MiFID II transaction reporting regime, which will present particular challenges for EEA firms operating in the EEA under the TPR. The FCA reiterates that it expects TPR firms to use the additional time between now and the end of October to prepare to meet these obligations and confirms that it will publish further information before exit day on how firms should comply with post-exit rules.

The PRA and BoE have published a related consultation paper, which provides an update on the BoE and PRA’s approach to the TTP. The consultation also briefly explains and consults on the proposals to amend further certain regulatory requirements to take account of changes to EU law taking effect between March and October 2019. On use of the TTP, the PRA and BoE confirm, consistent with the FCA, that the proposed adjusted fixed end date for the TTP directions will be 31 December 2020, and that the overall approach to use of the TTP remains generally unchanged from the approach previously outlined by the PRA and BoE.

PRA-regulated firms within the scope of the TPR are reminded that ,for the most part, the TTP will not apply to obligations arising in consequence of their status change upon entering the TPR. The PRA and BoE are also consulting on proposals to fix deficiencies arising from the UK’s withdrawal from the EU and to make consequential changes in light of the extension to the Article 50 period (in order to deal with EU binding technical standards (“BTS”) entering into force between March and October 2019). The PRA does not expect material changes to be required to address this. Changes required to take account of EU laws and regulations other than BTS remain the responsibility of HM Treasury, which is separately engaged on this exercise.  

 

Katherine Dillon
Katherine Dillon
Of Counsel, London
+44 20 7466 2522
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765

EU guidance on “no-deal” Brexit suggests increased risk Hague Convention on Choice of Court Agreements won’t apply to exclusive English jurisdiction clauses agreed pre-Brexit

The post below was first published on our Litigation blog.

As we have previously noted, there is some uncertainty over whether, following a “no-deal” Brexit, EU27 countries will apply the 2005 Hague Convention on Choice of Court Agreements where an exclusive English jurisdiction clause was agreed before exit day. This is sometimes referred to as the change of status risk, and it arises because the Convention applies only to exclusive jurisdiction clauses agreed after the Convention came into force for the chosen state. The UK is currently a party to the Convention by virtue of its EU membership, but that will cease on exit day and the UK will then re-join in its own right. As things currently stand, following the recent delays to Brexit and the UK’s resultant suspension of its accession to the Convention, the UK will re-join with effect from 1 November 2019.

The question therefore is whether EU27 countries will treat the Convention as having been in force for the UK since 1 October 2015, when the Convention came into force for the EU generally, or only from when it re-joins on 1 November. In the latter case, the Convention will not apply to exclusive English jurisdiction clauses agreed before that date, and therefore the recognition of such clauses and the enforcement of resulting English judgments will be a matter for domestic law in each EU27 country. In those circumstances most (but not necessarily all) EU countries are likely to enforce English judgments in many circumstances, but the type of judgment enforced may be more limited and the procedures involved more time-consuming and costly.

The change of status risk appears to have been heightened by recent guidance issued by the European Commission concerning civil justice in the case of a “no-deal” Brexit. The guidance is not entirely clear, but it seems to suggest that the Commission’s view is that the Convention will not apply to exclusive English jurisdiction agreements concluded before exit day. This is not of course conclusive – it could be that national courts in the EU27, and ultimately the CJEU, will adopt a different interpretation. However, it is obviously unhelpful to parties who are entering into exclusive English jurisdiction clauses now, or have done so since 1 October 2015, and would wish to obtain the benefit of the Convention in the event of a “no-deal” Brexit.

We have updated our decision tree on enforcement of English judgments in the EU27 post-Brexit (which was first published on 26 March 2019) to reflect the recent delays to Brexit and the UK’s accession to the Hague Convention. Please click on the image below to access the document.