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

Brexit – Impact of Article 50 extension on the UK Temporary Permissions Regime

Following last week’s agreement between the UK and the EU to extend Article 50 until 31 October 2019, the FCA has confirmed that it will also extend the deadline for incoming EEA firms to enter the UK Temporary Permissions Regime (“TPR“) to 30 May 2019.  The FCA’s announcement only applies to firms for which the FCA is the “relevant regulator”, which includes insurance intermediaries.

If the Withdrawal Agreement can be ratified by 30 May 2019, the TPR will not come into force. This is because an implementation period would allow incoming EEA firms to continue their activities in (or into) the UK until the end of December 2020.

If no agreement is reached by the UK and the EU before the end of May, it is not clear whether the FCA will extend the window for notification to align with the Article 50 deadline of 31 October 2019.   The FCA has stated that it will continue to keep the TPR notification window under review, but it is unlikely that further detail will be provided until there is greater political clarity on if, when and how the UK will leave the EU.

In light of this uncertainty, any incoming EEA intermediaries who intend to rely on the TPR should proceed on the assumption that they will need to submit their notifications by the end of 30 May 2019.

The position for insurers is different.  The PRA has confirmed that “[the] deadline for a firm to notify the PRA that it wishes to enter the TPR has passed” and that it “does not intend to further extend the notification period”.

The period for notifications set out in the PRA’s Direction: ‘Temporary permission and variation: notification before exit day’ 7 November 2018 as amended by the PRA Direction – ‘Temporary permission and variation: notification before exit day (amendment) 28 March 2019) ended on 11 April 2019. The validity of notifications made by insurers before the deadline is not affected.

FCA Brexit guidance – too little, too late?

With a month to go until the UK is due to leave the EU, FCA guidance published yesterday is too late for most UK insurers and intermediaries to change their plans.  Understandably, the FCA has waited for views to be expressed by EIOPA before commenting itself on the position for insurers and brokers.  It took until last week, though, for that EIOPA guidance to be published (see our previous comments).   The FCA’s guidance adds little, if anything, to what was said by EIOPA.  For brokers, in particular, the FCA acknowledges that this is “a complex area” and advises firms to contact local EEA regulators and seek legal advice.

Two FCA statements are directed at insurers and insurance intermediaries:

Some key points are set out below.  A warning about the advice issued by FCA is, however, that much of the following is a matter of individual EEA state discretion.  It cannot be assumed, therefore, that the approach advocated by the FCA (and by EIOPA) will be adopted in all jurisdictions.  As is often the case for Brexit-related questions, the answer depends on taking local advice in the relevant EEA state.

The FCA has followed up today with the publication of near-final rules and guidance that will apply if the UK leaves the EU without a deal (see FCA PS19/5).  The PRA has also published an update to firms on its plans for Brexit, including near final materials (see PRA PS5/19).  Feedback from both regulators includes further details on use of the temporary transition power, through which they aim to ensure that firms and other regulated entities do not generally need to prepare now to meet new UK regulatory obligations.  In most cases, firms will be given a period of 15 months to adapt to these changes.

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EIOPA issues Brexit advice – some good news for UK insurers and intermediaries?

Recommendations issued on Tuesday by EIOPA emphasise the importance of safeguarding policyholders in the event of a “no deal” Brexit.  Encouragement given to EEA states to help UK insurers meet their obligations to EEA policyholders is particularly welcome.

In some areas, EIOPA has provided explicit guidance on the approach it expects individual states to take.  For example, it is clear (and unsurprising) that UK insurers should not be allowed to write new contracts in the EEA without authorisation. In other areas, EIOPA has taken a “softer” approach.  Examples include that regulators:

  • should apply “a legal framework or mechanism to facilitate the orderly run-off” of business which becomes unauthorised as a consequence of Brexit; and
  • should not prejudice policyholders who have “an option or right in an existing insurance contract to realise their pension benefits“.

Overall, EIOPA’s announcement attempts to strike an appropriate balance, reflecting the considerable lobbying efforts by UK and EU27 trade bodies.  Its acknowledgement of individual state discretion in a number of key areas does, however, still leave uncertainty for UK firms planning for 29 March 2019.  There is also nothing in EIOPA’s recommendations that could not have been said many months (or even years) ago.  It is a pity that politics have prevented earlier publication of these recommendations, leaving industry to spend many millions on unnecessary legal advice and other contingency planning.

EIOPA has given national regulators 2 months to say if they comply with each recommendation, or explain non-compliance.

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Preparing for Brexit: EEA (re)insurers – UK Temporary Permissions Regime

The FCA portal for incoming EEA firms to notify the PRA and the FCA of their intention to enter the UK Temporary Permissions Regime (“TPR”) is now open.

The TPR will apply if the UK leaves the EU on 29 March 2019 without an implementation (transitional) period. It ensures that EEA firms currently operating under an incoming passport (either from a UK branch or on a cross-border services basis into the UK) can continue to carry out regulated activities in the UK until they receive new direct authorisation by the UK regulators.

This short “at a glance” guide contains an overview of how the TPR will apply to EEA (re)insurers and suggests some next steps.  Notifications must be submitted before 29 March 2019.

 

Brexit deal – what does it mean for insurers and insurance intermediaries?

Yesterday’s announcements on the terms agreed for the UK’s withdrawal from the EU say relatively little about the future framework for cross-border trade in goods or services.  More detail is expected on this next week.

The final deal remains subject to approval by the European Council, the EU Parliament and, crucially, the UK Parliament.  Nonetheless, yesterday’s agreement must have increased the chances of a transitional (or implementation) period for the UK’s withdrawal from the EU.  During that period, both (re)insurers and (re)insurance intermediaries would continue to benefit from the passporting rights that they currently hold, but ultimately stand to lose.

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Brexit – Deal on financial services may deliver little for insurance industry

Press reports over the past couple of days suggest that a deal struck by the UK government would “give UK financial services companies continued access to European markets after Brexit” and that “UK financial companies will be able to operate as they now do in Europe“.

There has not been any confirmation that a deal on services has in fact been reached. Rather, there have been denials. Any deal on services is also dependent on all other aspects of a withdrawal agreement and the new UK-EU relationship being agreed.

The press reports suggest that the EU may have agreed to accept that the UK regulatory regime is “equivalent” to EU standards (which will undoubtedly be true at the time of exit), and that the UK will be given greater certainty than other third countries that this acceptance will not be arbitrarily withdrawn. Michel Barnier has since suggested (in a tweet on 1 November) that this greater certainty for the UK as to withdrawal of equivalence may not be forthcoming.

Whether or not a deal has in fact been reached on services, it is important to recognise that securing “equivalence” does not mean that UK insurers and intermediaries can continue to carry on cross-border business as if they held passporting rights.

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EIOPA issues second warning about the impact of Brexit on insurance contracts

EIOPA has published an opinion and FAQs emphasising the need for insurers and insurance intermediaries to explain to policyholders how Brexit will affect their insurance cover.

At first sight, EIOPA’s comments appear to reinforce concerns that political compromise cannot be expected on policies written (or performed) on a cross-border basis before the UK’s withdrawal from the EU (so-called “legacy contracts”). The particular issue for UK insurers is whether they will have the authorisation they need, post-Brexit, to continue to meet their obligations to EEA policyholders under these contracts. Closer examination of the words used by EIOPA may, however, mean that fewer policies are caught by this issue than has been assumed to date.

Our discussion of EIOPA’s latest opinion can be found here.

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BREXIT UPDATE – EEA (RE)INSURERS

EEA insurers and reinsurers doing business in the UK under the insurance passport must prepare for the UK’s withdrawal from the EU. We consider, in our latest “At a Glance” guide, the impact of Brexit on the cross-border activities of EEA (re)insurers, including how firms might respond to the European Council’s recent agreement to a transition period.

The “At a Glance” guide can be found here.