Amendments proposed to Solvency II in readiness for Brexit
The UK Government has published a statutory instrument entitled The Solvency 2 and Insurance (Amendment etc.) (EU Exit) Regulations 2018 (“the SI”)…
The UK Government has published a statutory instrument entitled The Solvency 2 and Insurance (Amendment etc.) (EU Exit) Regulations 2018 (“the SI”) containing proposed amendments to the Solvency II Regulations 2015 which will take effect on 29 March 2019.
The Solvency II Directive (“the Directive”) was implemented within UK law by the Solvency II Regulations 2015, the Solvency II Delegated Regulation and the Prudential Regulation Authority’s (“PRA”) Rulebook. We need no reminder about the driving force behind the Directive: policyholder protection achieved by insurers complying with risk and capital requirements. The benefits achieved by the implementation of the Directive are so great that the UK Government believes the provisions ought to remain beyond Brexit.
The SI has been drafted in an attempt to ‘plug the gaps’ in the already existing domestic legislation to ensure that it remains ‘fit for purpose’ beyond Brexit when the UK will become a third country. In particular, the amendments focus upon (although not exclusively):-
- The issue of regulation, as UK groups with European Economic Area (“EEA”) subsidiaries may become subject to supervision by EEA authorities. The amendment aims to ensure that the 27 remaining EU Members will also become third countries and subject to PRA supervision where an EEA group has UK subsidiaries.
- Equivalence, as the UK will, post Brexit, no longer fall under the jurisdiction of the European Commission. The SI proposes that HM Treasury will take on the functions of the European Commission when determining third country equivalence regimes.
- The PRA taking over the European Insurance and Occupational Pensions Authority (“EIOPA”) responsibility for technical assessments of third country regimes and the technical information on the risk free rate.
- The Prudential Regulation Committee of the Bank of England assuming responsibility for declaring an “exceptional adverse situation” for the insurance market.
- The PRA will update its Rulebook and will consult with stakeholders during the autumn.
This SI does however demonstrate to the 27 EU Members that the UK takes Solvency II seriously and that there will be common ground for our market in the future, which may well assist in a financial market deal and go some way to protect London’s reputation as the financial centre of Europe.
This SI will form only one of hundreds proposed by the UK Government to rectify any gaps or amendments in domestic legislation to maintain stability of that legislation beyond Brexit. Whilst it is reassuring for both insurers/reinsurers and policyholders alike that Solvency II will remain on the statute book beyond Brexit, close attention must be paid to whether amendments made by secondary legislation are laid before Parliament in sufficient time before Brexit and whether amendments do actually adequately plug any emerging gaps. There is also the chance that satellite litigation will arise following the passing of further secondary legislation, either challenging the interpretation of the SI or via judicial review.
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