The U.K. Prudential Regulation Authority will continue to allow European Economic Area-based insurers to set up branches rather than full subsidiaries to trade in the U.K. after Brexit, and at the same time has proposed changes to the way it authorizes foreign insurance branches.
EEA-based insurers and other financial services firms can currently establish branches using so-called passporting rules, which allow companies to trade across the EEA under their home country license. However, passporting rules will be lost after Brexit, and the PRA noted that "absent some new agreement in relation to EEA firms, these firms would have to apply for authorization in order to undertake PRA-regulated activities" in the U.K. post-Brexit.
The regulator confirmed that, as with banks, it will continue allowing EEA-based insurers to operate as branches in the U.K., although they will need PRA authorization to do so.
To determine whether an insurance company can set up a branch rather than a full subsidiary, the PRA is proposing that in addition to its existing requirement for the company's home state regulation to be "broadly equivalent" to that in the U.K., it also considers how much of the branch's activity is covered by the U.K. Financial Services Compensation Scheme, or FSCS. The scheme pays customers of financial services firms when the firms themselves are unable to do so.
The PRA proposes that firms that are likely to have more than £200 million of FSCS-protected liabilities should apply to be authorized as a subsidiary rather than a branch, although it added that this is is not a hard limit. The PRA also proposed considering the effect of a branch failure on the wider insurance market and financial system when determining whether a non-U.K. insurer can set up a branch.
The regulator has proposed considering a range of factors about the risks posed by a branch, including the availability of substitute products and the branch's market share in a niche market.
Interested parties have until Feb. 27, 2018, to comment on the proposed changes.
The proposal comes in tandem with an announcement from the U.K. Treasury that it will act to mitigate risks to the continuity of EEA firms' contracts in the U.K.
Trade bodies representing U.K. insurers welcomed the proposals. Association of British Insurers director of regulation Hugh Savill said: "The pragmatic approach being taken by the British authorities marks a breakthrough in Brexit preparations for the UK's financial sector. By taking unilateral action to pursue openness, important clarity has been provided for insurers — as we have long called for."
Dave Matcham, CEO of the International Underwriting Association, a trade body for non-Lloyd's underwriters in London, said: "The London company market has a significant number of firms operating as branches of parent companies located elsewhere in the EU. Our recent London Company Market Statistics Report estimates premium totaling £7.383 billion was generated by such business models in 2016. The move to enable this business to continue without any unnecessary, additional regulatory barriers post-Brexit is a very positive step and demonstrates great confidence in our sector."