On 31 May, the European Securities and Markets Authority (ESMA) published an Opinion1 which explains how EU financial markets regulators should deal with market participants which seek to relocate entities, activities and functions from the UK to other EU member states as part of their preparations for Brexit. In short, the Opinion’s message is that there will be no lowering of standards for UK businesses which are seeking to relocate to, or establish a subsidiary in, another EU member state.

Although ESMA is technically an independent authority, it is directly accountable to several EU institutions so it is perhaps unsurprising that its Opinion mirrors the tough stance which the EU is taking in other Brexit-related statements. While ESMA’s Opinion does not apply to insurers, we expect that the EU authority with responsibility for insurance, EIOPA, will take a similar approach in order to maintain a level playing field across Europe until the UK’s post-Brexit relationship with the EU becomes clearer.

Since the UK voted to leave the EU, the insurance industry press has contained several reports of European regulators offering incentives to incoming business, such as lower requirements for staff to be on the ground, and greater flexibility to delegate certain responsibilities back to the UK.

However, ESMA’s Opinion states that firms must “be subject to the same standards of authorisation and ongoing supervision across the [EU] in order to avoid competition on regulatory and supervisory practices between member states.” On the specific issue of outsourcing and delegation to the UK, the Opinion states that it will be “possible only under strict conditions”, and even states that certain key activities and functions cannot be outsourced or delegated back to the UK.

Assuming EIOPA requires EU insurance regulators to adopt a similar position, UK businesses that were expecting to establish an entity in an EU member state but effectively run it using the existing functions in the UK will need to re-think their strategy. Insurance regulators in some smaller EU member states had used the ability to subcontract substantive functions back to the UK as a key selling point of their jurisdiction, although the German insurance regulator, BaFin, has already suggested that outsourcing to the UK would need to be carefully monitored.

While we are still some way off knowing what the UK’s relationship with the EU will be after Brexit, ESMA’s Opinion is consistent with a “hard” Brexit. It would be surprising if EIOPA took a different approach, so the Opinion again demonstrates the importance of preparing for Brexit in good time. Further information on how businesses operating in the insurance sector can prepare is available in HFW’s briefing, here: http://www.hfw.com/Preparing-for-Brexit-seven-things-that-re-insurance-businesses-can-do-now-July-2016.