No ‘regulation bonfire’ – but what about Brexit?

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2016-08-12

Locations

Providing evidence to the Treasury Committee on 20 July 2016, Andrew Bailey, newly appointed CEO of the Financial Conduct Authority (FCA), called for the UK to secure continued single market access and further trade agreements to help meet the FCA’s competition objective by advancing cross-border trade in financial services.

Bailey commented that he expects ‘no bonfire of regulation’ post-Brexit. He sees other issues as being crucial. Although Brexit might not lead to a wholesale roll back of significant international regulatory developments that have occurred over the past decade (and particularly since the events of 2008), is it really business as usual, or should insurers be alive to some changes afoot?

Macro view

It is expected on a macro level that the work of the International Association of Insurance Supervisors (IAIS) will continue at pace, with keen contribution from the Financial Stability Board (presently chaired by Mark Carney), the FCA and the Prudential Regulation Authority. Key initiatives include:

  • The Common Framework for the Supervision of Internationally Active Insurance (ComFrame)
  • The Risk-based Global Capital Standard
  • The methodology for dealing with global systemically important insurers (G-SIIs).

These initiatives remain imperative to deal with ever increasing interconnectedness in the financial system, ensuring insurer resilience and minimising ‘too big to fail’ risks.

Micro level

What we know so far on a more micro level is:

  • It is business as usual. In the words of the FCA, all laws and regulations applying to insurance must continue to be followed and there will be no bonfire of regulation.
  • The regulation framework as it relates to the key components of an insurer's right to transact business are both derived from and at the same time reliant on European Union Rules.

High-level aspects of transacting business include:

  • Authorisation to do business

Insurers who have relied to date on their FCA authorisation to sell their products and services throughout the EU will have to consider how best to establish a subsidiary within the EU. In turn, they will have to grapple with issues such as the timescale for processing the application and the attitude of local regulators to the substance that the local operation will have to demonstrate and maintain in terms of personnel and decision-making.

  • Distribution authorities

Member States have until 23 February 2018 to transpose the Insurance Distribution Directive (IDD) into national law, at which point the existing Insurance Mediation Directive (IMD) will be repealed.

As with the IMD, the IDD is a ‘minimum harmonisation’ directive, designed to regulate insurance sales. However, the IDD is wider in scope and will cover insurance distribution by intermediaries. In order to meet the underlying objectives to improve competition, facilitate cross-border trading and strengthen policyholder protection, the IDD will significantly raise the current minimum standards. Specifically, it will seek to level out regulatory standards across Member States, by aligning policies and standardising the sales process.

Whilst the UK remains a Member State of the EU, it will be required to implement the IDD. In practice, given that the UK ‘gold plated’ the minimum standards of the IMD, many of the provisions of the IDD are unlikely to materially alter existing insurance sales practices. 

  • Capital and solvency

Whether insurers will have to allocate capital to and maintain it in whatever jurisdiction they wish to seek EU authorisation will depend on the terms of the final trade deal.

Once the UK-EU negotiations are under way, we should receive some more reliable indications. For now, it seems possible that a UK insurer wishing to conduct insurance business in an EU member state will have to satisfy local solvency requirements if not via the current passporting system or some other way.

  • Investments

In the context of what is outlined above, it seems inevitable that there will be some major changes to the regulatory framework around funds and other holding structures. However, the extent for more discretionary changes (as facilitated by Brexit) are also apparent (even if not as evident). Insurers that play a part in the thought leadership on those required changes have a real opportunity to influence the debate and to facilitate important discretionary changes for the benefit of their customers, their shareholders and the public at large.

Checklist

Insurers will want to consider the wide range of issues and opportunities that flow from core business concerns. The outcome will depend (as already stated) upon the nature of the ongoing trade relationship between the UK and EU. Nevertheless, considering such issues now will assist survival in a Brexit world, which in outline include:

Products

Insurers should be considering how required or facilitated regulatory change would affect:

  • Existing products
  • Existing levies and charges and hence profitability
  • The potential for new product to be developed.

Indeed, Brexit may give rise to new material political or economic risks, or a combination of both. A detailed regulatory risk assessment will assist in revealing the issues and opportunities.

Capital
Whether or not Brexit will necessarily give rise to changes in capital and solvency regulations remains to be seen. One area where changes could be made is with regard to Insurance Linked Securities, providing insurers with greater or more diverse opportunities to access alternative capital.
Distribution 

It is certainly expected that the authority to distribute and the rights of distributors may be affected, and potentially significantly. An important early step in assessing distribution is to understand:

  • Whether new authorisations (and new structures possibly as a consequence) may be required and how best to plan for them.
  • Whether distributors themselves may be more restricted than previously, limiting the coverage of the insurer’s products, and requiring new partners and new agreements to be developed.
  • What other contingency plans may be necessary to deal with gaps in distribution.

Early negotiations or renegotiations may be required to deal with possible changes to remuneration, product scope or other matters. These will allow contingency plans to be developed, agreed upon and embedded in agreements to facilitate later implementation quickly and smoothly.

Investments
The manner of managing assets for the insurer’s own account and the access to investments for policyholders (where relevant) are key issues for the insurer to consider and plan for contingencies. Insurers should begin to assess:
  • Whether new funds or structures may be required, the time involved in establishing and/or migrating assets and whether these may require approval.
  • Whether new asset/investment managers may be required and where these may be best located.

Going forward, we will look at other considerations such as consumer and data protection, pensions, diverging approaches to employment protection and corporate governance as well as commercial dispute resolution. These may appear ‘softer’ issues now. However, they will come into sharper focus as insurers’ plans take shape. 

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