UK Government’s “no deal” guidance papers

Today saw the release of the first tranche of the UK Government’s Guidance papers (“the Guidance papers”) focusing on how individuals and businesses…

Is the position clearer for the financial services sector?

Today saw the release of the first tranche of the UK Government’s Guidance papers (“the Guidance papers”) focusing on how individuals and businesses can prepare for a ‘no deal’ Brexit. Whilst the UK Government goes to great lengths to stress that the Guidance papers do not reflect an increased likelihood of a ‘no deal’ outcome in the negotiations, the reality is that the EU Summit is now only six weeks away.

The ‘Banking, insurance and other financial services if there’s no Brexit deal paper’ (“the Insurance paper”) aims to provide stakeholders with information about the impact of ‘no deal’ and to explain the UK Government’s approach to ensuring there is a functioning financial services regulatory framework in any scenario.

It is timely to recap on the current position for regulated business from the UK to the EEA and vice versa. The financial services passport is a benefit enjoyed by the UK and the EEA member states by virtue of membership of the single market. If a financial services business is authorised in one member state, then it has been able to provide services to customers in other member states based on its home state regulation and without the need for any further regulation. The two types of passports, namely Freedom of services and Freedom of establishment have been used extensively.  However, on 29 March 2019 the passport rights will be lost (in the absence of a deal or an implementation period in the UK). It must also be remembered that the implementation period is a political agreement only at this stage and in the absence of a deal between the EU and UK, the implementation period will cease to exist.

There are three different scenarios covered by the Insurance paper:

  • UK based customers of UK based providers of financial services business;
  • UK based customers of EEA firms operating in the UK; and
  • EEA customers (including UK citizens living abroad) of UK firms operating in the EEA.

The first scenario delivers a benign outcome and business will remain as usual provided that the UK based provider is entirely UK based.

The second situation is being unilaterally dealt with by the UK Government by way of the Temporary Permissions Regimes (“TPR”). So, where UK based customers are currently accessing financial services business from an EEA insurer passporting into the UK, this will continue for up to three years post Brexit whilst the EEA business applies for the appropriate authorisation from UK regulators. The UK Government has announced, and is already acting on, its intention to bring forth domestic legislation to support this promise.

What remains unclear and most uncertain is the third scenario, where UK financial services businesses are providing services to customers within the EEA by way of the passport. The UK Government cannot unilaterally rectify the permissions regime required, as it can with the above scenario, and is reliant upon the EU to reciprocate (which has not been forthcoming as yet). Until such reciprocation is provided (if at all) then the uncertainty, in the absence of contingency planning implementation, remains a very real risk. Insurers in particular with a smaller insurance book of business currently taking advantage of the passport regime may find it not viable, for a host of reasons, to consider setting up a new entity within the EEA or in fact undertaking a Part 7 transfer. They therefore face the dilemma, post Brexit and in the absence of a deal, of potentially breaching the terms of the contract with the insured or conducting unauthorised business when attempting to service a policy that underwrites a risk beyond 29 March 2019.

Unfortunately, the Government’s Insurance paper does not go any way towards clarifying this challenging position which may well become a reality.

Whilst the majority of insurers have been contingency planning and implementing their specific plans in anticipation of no deal, those who are yet to do so would be ill advised to wait any longer. If we can assist or you require any strategic advice then please do not hesitate to contact us.

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