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and that the UK will be given greater certainty than other third countries that this acceptance will not be arbitrarily withdrawn.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.

Continued access to European markets

In our view, there has never been any question that UK insurers and intermediaries will be able to access European markets post-Brexit; the question is how will this compare to the pre-Brexit access? In July 2016, we stated the following in relation to insurers:

Withdrawal from the EU does not of itself mean that UK insurers and reinsurers will not be able to do business in EEA states. What it does mean is that they will not be able to carry on insurance activities on an EEA-wide basis as a matter of right (albeit subject to the necessary formalities), flowing from the UK’s membership of the EU. Instead, how they are able to access the EEA Market will depend in part on rules contained in the Solvency II Directive (“Solvency II”). To the extent not addressed under Solvency II, it will be up to individual EEA states to determine the conditions on which access is given to UK insurers and reinsurers.”

This position is not changed by any finding of equivalence for the UK regulatory regime.

UK’s July 2018 White Paper

In July this year, the UK government published a White Paper, setting out its vision for a future relationship between the EU and the UK (the so-called “Chequers” deal). In that paper, it stated:

The UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.”

Instead, the UK government would seek a deal based on a mutual finding of equivalence of the UK and EU regimes. The White Paper argued that its proposed approach would:

maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU.”

If the final deal on services does give the UK additional equivalence protections (such as comfort in relation to arbitrary withdrawal reported in the last few days), we think that this later statement in the White Paper is, at best, misleading when it comes to the insurance sector.

Equivalence as a substitute for Solvency II and IDD passporting rights

Unfortunately, “equivalence” means different things in different contexts in EU financial services legislation. At the broadest level, it can mean having a regime in the UK that is broadly aligned (i.e. “equivalent”) to that applying throughout the EU.

Under Solvency II, “equivalence” has a more technical meaning. Solvency II applies a test of “equivalence” to the regulatory regimes of jurisdictions outside the EEA in three contexts:

  • Article 172 – Reinsurance provided by a non-EEA reinsurer: Contracts between an EEA cedant and a non-EEA reinsurer which is located in a jurisdiction whose solvency regime is assessed to be “equivalent” for the purpose of this Article must be treated in the same manner as if that contract were concluded with an EEA reinsurer.
  • Article 227 – Group solvency – related companies located in a non-EEA jurisdiction: Where a Solvency II group contains a non-EEA insurer which is located in a jurisdiction whose solvency regime is assessed to be “equivalent” for the purpose of this Article, the group may apply to use local rules in capital calculations carried out under the deduction and aggregation method. Such an application may or may not be granted.
  • Article 260 – Group supervision: Where the ultimate insurance holding company in a Solvency II group is headquartered in a non-EEA jurisdiction which is assessed as having a system of group supervision that is “equivalent” to that operated under Solvency II, EEA supervisors must rely on supervision of that group by the national supervisor in that jurisdiction.

Whilst a determination that the post-Brexit UK regulatory regime is “equivalent” under any of these heads would have some value for certain UK (re)insurers, it would not mean that UK insurers would “retain access” to the EEA Market. The benefits UK insurers would gain from a finding of equivalence in each case fall considerably short of offsetting the loss of the passport.

In the case of intermediaries, “equivalence” has no meaning whatsoever under the IDD. We do not see how a finding of equivalence materially assists those wishing to distribute insurance cross-border.

The position under Solvency II and the IDD is in contrast to the position under some other financial services directives, where a finding of equivalence would be considerably more meaningful in maintaining UK access to the EEA single market.

In summary, press reports that the deal secured by the government will safeguard the current position of UK financial services companies and allow them to operate “as they do now” are likely to be wide of the mark, at least so far as insurers and intermediaries are concerned.