Onshoring the Part VII insurance transfer regime
The Part VII transfer under the Financial Services and Markets Act 2000 (FSMA) has been a key element of the Brexit restructuring toolkit for UK insurers, enabling transfers of European insurance to EU-domiciled affiliates or subsidiaries (and vice versa) through a court-sanctioned legal transfer process. However, the use of Part VII to transfer EU business will be significantly affected by Brexit, as shown by the UK’s proposed “onshoring” legislation.
At the end of last year, HM Treasury published the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (the SI), which was published alongside an explanatory note. The note confirms the SI (which is still under development) will only take effect on exit day (March 29, 2019) if the UK does not enter into the withdrawal agreement (within the transition period). Most noteworthy to insurers are the SI amendments to Part VII of the FSMA.
Once the UK leaves the EU, the SI proposes the repeal of Solvency II based provisions relating to transfers of insurance business from the UK to the European Economic Area (EEA) and vice versa. The effect is that after exit day, subject to the “savings” provision referred to below, Part VII will only be available to domestic transfers from a UK authorised person and that results in the business being carried on from an establishment of the transferee in the UK (ie, an authorised UK insurer or a UK-authorised branch of a third-country insurer).
The section in the FSMA that deals with the recognition of transfers authorised in other EEA states is also deleted by the SI. As a result, the prevailing laws on recognition will apply where, for example, an EU insurer transfers English law insurance policies under their own portfolio transfer regime.
Similarly, the EU recognition of UK Part VII transfer sanction orders will no longer be derived from the Solvency II framework and will fall back on prevailing laws. This will be an important new due diligence point for any insurer considering a transfer.
Significantly, the explanatory note refers to a proposal to introduce a “savings” provision, which would allow up to two years from exit day for parties that have already initiated a Part VII transfer under the pre-exit process to obtain a court order sanctioning the transfer between UK and EEA entities. For the savings provision to be available, the regulatory transaction fee must be paid to the Prudential Regulation Authority and an independent expert required for the transfer must be approved by the regulators and appointed.
Insurers looking to transfer EU insurance business into an EEA entity and that wish to take advantage of the savings provision must act quickly – the current timeframe for regulatory approval of an expert is three to four weeks. It should also be borne in mind the Part VII insurance transfer after the exit date will require a more detailed analysis of the recognition of a UK judgment in relation to the Part VII by EU courts, as the recognition of a transfer based on Solvency II may not be available.
This article first appeared in Insurance Day