The impact of Brexit on insurance broking services

The focus of most articles on Brexit and financial services has been on how Solvency II will impact the way insurers (and other financial institutions) do business now that the UK has left the EU and declined to remain in the single market. Important though this issue is, for many UK-based insurance brokers, the more pressing Brexit issue has been the loss of access to the EU single passport regime under the Insurance Distribution Directive.

With the UK becoming a ‘third country’ following Brexit, UK-authorised insurance brokers are now precluded from doing business in an EEA jurisdiction without obtaining the required local licences to do so.

During the political build-up to Brexit, it would appear that most large UK-based insurance brokers concluded that the most effective way to protect their businesses following the transition period was to set up an ‘office of convenience’ in an EEA member state (if they didn’t have one already) or to merge with or acquire an EEA-based broking firm. Either way, this would allow them to continue using the EU single passport regime to access EEA-wide markets.

For most medium-sized UK-based insurance brokers, things have not been so easy.

Much hope was pinned on the UK-EU Trade and Cooperation Agreement (TCA) creating a free trade agreement to uphold the principles of market integrity, financial stability and the protection of investors and consumers. But this possibility of achieving a state of equivalence between the EU and the UK has now all but evaporated, with the EU remaining unenthusiastic about encouraging cross-border financial services.

To avoid a catastrophic Brexit cliff edge, the UK government established a temporary permission regime (TPR) and temporary recognition regime (TRR) for firms doing business in the UK prior to Brexit. But these transitional regimes are of little benefit to most UK-based brokers as they only create a one-way bridge for EEA-based firms providing financial services into the UK. For UK-based brokers to rely on a parallel regime in an EEA member state, the firm must first ensure that such a regime is offered by the regulator in that member state, as not all of them do. The Financial Conduct Authority (FCA) has, helpfully, provided a table showing which EEA member states have transitional regimes but, unhelpfully, does not warrant the accuracy or completeness of the information.

In our work providing specialist legal support to insurance brokers, we are aware of some firms declining business because of the uncertain regulatory environment created by Brexit.

We are also sure there will be some firms who are blindly walking through this regulatory minefield with little comprehension of the long-term ramifications.

Relying on transitional regimes is a short-term fix not really a long-term solution. So, what can UK-based brokers do if they want to operate throughout the EEA on a long-term basis?

Here are four potential options:

Option 1 - Establish a branch in an EEA member state
By becoming licensed or authorised in an EEA member state, you will regain your EU passporting rights. Ireland is becoming a popular choice for some, given its proximity and common language, but the Irish regulator is starting to clamp down on ‘empty shell firms’ and imposing stringent requirements regarding personnel and systems and controls within any new branch or subsidiary. To continue carrying on regulated activity in the UK, a UK-based broker will need to retain its FCA authorised status.

Option 2 - Relocate to Gibraltar
Firms licensed by the Gibraltar regulator retain the ability to passport into EEA member states and into the UK under the current transitional regime. The Gibraltar Access Regime is also eagerly awaited.

Option 3 - Acquire an EEA firm
Acquiring an EEA firm which is already authorised or licensed by a local regulator avoids the need to establish a firm from the ground up.

Option 4 - Use a local placing broker
This is a ‘simple’ solution, but it involves sacrificing some remuneration to the placing broker and ensuring your contractual relationships with your client and the placing broker are watertight and compliant.

Picking the right option requires careful research, proper financial modelling and building a structure that is founded on sound, practical advice on what each EEA member state requires regarding transitional regimes, licences, and authorisations.

The good news is there will be a way forward.