Out-Law Analysis | 27 Apr 2016 | 10:18 am | 2 min. read
This is part of Out-Law's series of news and insights from Pinsent Masons lawyers and other experts on the impact of the UK's EU referendum. Sign up to receive our Brexit updates by email.
Depending on the form that a so-called 'Brexit' takes, the loss to firms of the ability to passport into other member states in order to establish branches or provide cross-border services could increase the regulatory burdens on UK insurers. Under single market rules, firms authorised in the UK under the Financial Services and Markets Act 2000 (FSMA) can apply to operate in other states located in the European Economic Area (EEA), without necessarily having to obtain the necessary regulatory permissions in each of those states.
The UK is likely to seek to retain access to EU markets in the event of a vote to leave by negotiating a free trade agreement with the EU. It is uncertain what course the negotiations with the remaining EU states will take, although the remaining states will doubtless seek a level of commitment in return for free trade arrangements. Given the wide-ranging nature of EU influence, there are many areas outside insurance that the Government would also need to address in any negotiations and so insurance may not get the same level of focus in an exit process that it has perhaps had over a considerable period of UK membership of the EU.
The direction of Brexit negotiations in the event of a vote to leave the EU could therefore have significant consequences for UK insurers. Even if the UK decides not to change the laws that are based on European requirements, positive action would be required if directly-applicable EU rules were to continue to apply in the UK past a Brexit. In preserving business in remaining EU countries, UK insurers may still find they need to comply with with EU regulation when selling and distributing insurance cross-border, but with little capacity to influence those regulations without being part of the EU.
Access to the single market
A very significant portion of the UK insurance industry's revenue comes from the EU. Indeed, trade body the Association of British Insurers (ABI) estimates that UK firms sell £21 billion more in insurance and long-term savings products to the rest of the EU than are sold to the UK by firms from elsewhere in the EU. The passporting regime is designed to create a more level playing field between UK firms and those from elsewhere in the EU when competing for business across the trading bloc.
Passporting allows authorised firms to carry on activities in other EEA member states on the basis of their home state authorisation, either by opening a branch in the host member state or on a cross-border services basis, without having to open a branch.
Passporting carries obvious benefits for EU firms that do not need to obtain authorisation in every country in which they operate. But it also has implications for firms from outside Europe.
So-called 'third country' firms from the likes of the US or Japan who may be attracted by the financial centre of the City of London, can obtain authorisation in the UK and then apply to passport into other EU states based on their UK permission. In the event of Brexit, these insurers may need either to obtain further authorisations within the EU or establish separate regulated entities in each jurisdiction in which they operate to continue existing cross-border activity. Some may even consider relocating their European corporate centres to a country remaining within the EU to ensure that they can still benefit from the passporting regime based on authorisation by an EU state.
It is clear that firms with cross-border insurance businesses across the EU should not be waiting until 24 June to start considering scenarios for their businesses that might apply if the UK does vote to leave the EU.
Tobin Ashby is an insurance regulation expert at Pinsent Masons, the law firm behind Out-Law.com.