Time is running out for businesses to get Brexit-ready

As businesses have focused on surviving the coronavirus pandemic, Brexit preparations have understandably fallen down the wayside, but time is running out for firms to get ready.

Speaking at the virtual Airmic Fest conference, a panel of experts warned that negotiations are down to the wire, and risk managers must get ready for all possible outcomes – including No Deal.

While some panellists were cautiously optimistic that the UK will secure a slim deal to leave the EU, all agreed that businesses need to put technical provisions in place to continue to successfully operate should we fail to secure a deal.

Even if a slim deal is secured, the panel warned that many of the equivalency agreements may not yet be ready which could spell trouble for insurers, brokers and their clients.

Dr Kay Swinburne, vice-chair of financial services at KPMG, said: “If it’s a skinny Free Trade Agreement with a minimum amount of stuff in it in order just to get something over the line then I would suggest it’s unlikely we will have detailed annexes attached to it and therefore over time one will have to actually try and expand that skinny FTA to something that looks a little more comprehensive.

“There are some big issues outstanding for financial services. The term equivalence has become really quite toxic and so we do have to consider even if there is an FTA, the equivalence process could sit outside of that and that the equivalence determination is different depending on what piece of legislation you’re looking at.

“These decisions were supposed to have been made by both sides on each other’s financial services in July of this year, but the EU decided it was not going to make those determinations… It also shot a warning across the bow saying on certain areas it may not make equivalence determinations until the IFR2 comes into force which could be Q1 or Q2 next year and withholding that equivalence is actually a real problem for the London capital markets and for many of the players who participate in them.”

The good news is that insurers and brokers have been working hard to get ready for the end of the transition period.

From an insurance perspective, the most immediate issue is the loss of passporting rights from December 31. To tackle this, insurers have been setting up European hubs where they did not already exist and using Part 7 transfers to shift outstanding liabilities in respect of unexpired policies and claims.

For instance, Lloyds Syndicates is undertaking a Part 7 transfer to ensure the orderly run off of existing EU policies and claims so as to ensure that it does not breach its legal and regulatory requirements.

Brokers have also been busy, applying for something called reverse branches, which allow UK teams to continue working on European business.

EIOPA’s Recommendation 9 states that all activity that is covered by the Insurance Distribution Directive, whether it relates to issuing the policy, paying a claim etc, must be conducted by properly EU licenced carriers and intermediaries.

The idea is to ensure that their customers are given the protection they need. The rules only apply to ‘Impacted Business’ where both the risk and the domicile of the policyholder are based in the EU. Any risk managers to whom this applies, must check that their brokers have applied for reverse branching as there is only 98 days left to do so.

Roy White, chairman, UK & Ireland at Marsh JLT Speciality said: “I know first-hand that the establishment of these reverse branches takes a lot of time preparedness and effort. It includes the need to get the branch approved with the appropriate regulator in Europe you then have to train your colleagues on the regulatory regime of that particular regulator and you’ve got to get new systems in place, tested and safely operational before the end of the year.

“If you’re in the EEA based client and you want to access the solutions of the UK insurance market and continue to have engagement with the know-how and expertise of UK brokers you’ve got to actually have an arrangement in place to engage with a broker with one of these reverse branches.”

Reverse branches isn’t the end of the upheaval for brokers, and many may have to make further changes as we head into the temporary permissions regime if they wish to continue dealing with European clients.

Keith Stern, regional manager, UK & Ireland at Lloyds, explained: “As we go into the temporary permissions regime from the 1st of January – things become somewhat more complicated. Effectively, those UK branches of European entities then having to go through a process where they re-register as what is known as a ‘third country branch’ and the requirements in terms of capital insolvency may make that quite an onerous process. But we simply don’t know at this stage quite what’s involved.”

Clearly uncertainty remains, and there is still some way to go until the UK insurance and broker markets will be set up for a post-Brexit world. And with negotiations over a deal still under way and little clarity over what the final position will be, risk managers will have to watch closely to see how future equivalences and regulations come into play.

Suzy Awford, head of regulatory and government affairs, AIG UK concluded: “The starting point is that the industry is really prepared for anything… I think the message from the industry is that the competitiveness of the UK will be absolutely critical in our post-Brexit world and going forward, irrespective of deal or no deal, what we will need is really clear channels of communication with EU regulators and policymakers so that when there is divergence it’s thoughtful and there’s a framework to make sure it’s the right decision for industry and for society.”