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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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

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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Further PRA reform of Solvency II implementation – internal models and reporting

This article was first published on Thomson Reuters Regulatory Intelligence on 17th January 2018.

On 12 December 2017, the PRA published the second in a series of three consultation papers on reforms to the Solvency II regime (CP27/17).  The PRA’s proposals are intended to reduce how often an insurer must apply for approval of changes to its internal model, specifically where approval is needed for an accumulation of minor changes. A process for quarterly model change reporting is also proposed.

The third, and final, consultation paper in the series (CP2/18) was published on 12 January 2018 and proposed some changes to reporting requirements.

CP21/17, the PRA’s first consultation paper in this series, concerns the matching adjustment and is open for comments until 31 January 2018 (see our blog entry of 17 November 2017).

Other aspects of Solvency II that the PRA has confirmed it is looking at are:

  • recalculation of the Transitional Measure on Technical Provisions – the PRA is looking at further simplification of the recalculation process; and
  • external audit of Solvency and Financial Condition Report – the PRA is gathering evidence on whether its approach remains proportionate, particularly for smaller firms.

Responses to CP27/17 and CP2/18 are required by 20 March 2018 and 13 April 2018 respectively. This article looks, in particular, at changes proposed by CP27/17[1].

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PRA proposes reforms to Solvency II regime

This article was first published on Thomson Reuters Regulatory Intelligence.

The PRA has published the first of three consultation papers (CP21/17) on reforming the Solvency II regime.

The consultation reflects PRA experience of working with Solvency II since its introduction in January 2016, while covering some of the improvements proposed by the ABI and discussed earlier this year with the House of Commons Treasury Committee.

This first consultation paper contains some new guidance from the PRA on firms’ use of the matching adjustment. It also consolidates earlier guidance, allowing firms to comment on the PRA’s approach for the first time. The PRA’s aim is not to change its existing guidance but to improve a firm’s chance of making a successful MA application. Continue reading

EXTENDING THE SENIOR MANAGERS AND CERTIFICATION REGIME TO INSURERS

The UK Senior Managers and Certification Regime (SMCR) is being extended to all financial services firms during 2018. PRA and FCA proposals applying to insurers build on the Senior Insurance Managers Regime (SIMR) although the transition to the SMCR is complicated by overlapping Solvency II requirements.

We have prepared a guide for insurers to the proposals set out in PRA CP14/7 and FCA CP17/26 (please click here for a copy).

Our experience of working with clients on the SMCR and the SIMR suggests that implementation projects should begin now rather than waiting for the outcome of the consultations.

PRA adopts questionable approach to regulatory compliance

Recent comments made by Sam Woods, CEO of the PRA, about the PRA’s approach to supervision are worrying.  A speech prepared for this year’s Building Societies Annual Conference (but not actually delivered) is relevant to all authorised firms, not just building societies.  Parts of the speech, which relate to Solvency II rules on contract boundaries, are specifically directed at insurers.

In summary:

  • The PRA argues that is not enough for firms to meet the requirements of the regulatory regime; they must also comply with the “spirit” of the rules.
  • The PRA will form its own judgement about what this means for firms, despite the UK’s obligations under EU law.
  • Mr Woods’ failure to acknowledge EU constraints on the content of the applicable rules, and therefore the PRA’s use of its supervisory powers, appears to confirm that the PRA is willing to “gold-plate” EU legislation despite saying on many occasions that it would not.

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