Talking to EU cross-border life companies in Luxembourg and Dublin over the past few months, I’ve been surprised at the wide variation in both the level of understanding regarding the possible impact of Brexit and the level of preparedness that exists in the event of an unfriendly Brexit outcome.
Think again
I’ll give you a good example.
By common consent, the default solution for writing new business in the UK following a Brexit services ‘lock-out’, and any transition period, is to establish a life company in one of the UK dependent territories.
The logic behind this being access to the UK market under section 72 of the Financial Services & Markets Act 2000, which is the basis by which many life companies in the Isle of Man and Guernsey currently transact with the UK and will continue to do so after Brexit.
Okay, so that may work for writing new UK business, but what about existing UK policyholders?
If you think you can just simply transfer policies to a new Isle of Man or Guernsey company – then think again.
Solvency II barrier
EU insurers have been part of the Solvency II regime since 2016, as have UK policyholders. But none of the dependent territories currently have Solvency II or equivalence status.
This means that it’s extremely unlikely that the European Insurance & Occupational Pension Authority (Eiopa) will allow the transfer of the policyholder assets from a Solvency II world to one that isn’t.
It’s likely that the dependent territories will eventually gain Solvency II equivalence; but on the basis the UK will be ahead of them in the queue with Eiopa, it’s certainly not going to happen within the expected Brexit transition period.
If existing UK policyholders remain with an EU life company, the chances are that the insurer won’t be able to have a contractual relationship with them post-Brexit.
The life company might be able to post a valuation statement each year, but if the clients want to top-up their investment or switch a fund, it’s unlikely there would be any legal basis to do so.
Existing UK policyholders would then be in danger of becoming ‘stateless’, and for this group ‘Treating Customers Fairly’ might be quite a challenge.
Sister companies
Dublin or Luxembourg life companies fortunate to have a sister company in one of the UK dependent territories probably assume they already have an in-house ‘Brexit Safe Harbour’ solution in place, if the worst comes to the worst.
Sadly, no.
The same existing client transfer issues are also likely to be applicable.
Similarly, EU life companies with existing UK policyholders that are now either entirely closed to new business or no longer accepting new business from UK sources, are also impacted by Brexit in the way described above.
Such companies may be prepared to take a more ‘relaxed’ view on this issue, but they are ultimately no less responsible for their UK clients than a company that is still open to new UK business.
The number of potentially Brexit-impacted companies is therefore far greater than just those that are currently writing new UK business, and includes any EU life company with existing UK policyholders.
The possibility of making existing UK policyholders ‘stateless’ is just one of the many unintended consequences of Brexit, and something that no sane regulator surely wants to encourage.
A dialogue on these issues is currently underway and the basis of a solution for existing UK policyholders of EU life companies post-Brexit is beginning to emerge.
However, there is currently a poor level of understanding regarding the possible impact of Brexit on existing UK clients, and there’s an urgent need to fill the information void that exists on this and several other Brexit issues before the Withdrawal Agreement crystallises the issue in the autumn.
Unfortunately, right now, there is rather more evidence of EU cross-border life companies, “hoping for the best”, and rather fewer “planning for the worst”.
