David Worsfold
The pace of announcements by UK insurers and brokers of new domiciles within the European Union for their post-Brexit operations has quickened in the last few months. Many are talking down the extent of the operations and staff who will have to move to service the business of EU clients. The regulators have other ideas.
Tough talking from the European Insurance and Occupational Pensions Authority (EIOPA) can’t be seen in isolation. Put alongside the growing – and almost irresistible – pressure to move Euro clearing away from London, there could be a lot of insurance company and pension fund investment managers packing their bags in the next few years.
Top choices for the new or expanded operations so far are Dublin, Brussels and Luxembourg, although Frankfurt and Paris are still pressing their credentials very hard with several charm offensives making their way around the City and Canary Wharf this summer. While we are seeing more announcements about location, we are still lacking much in the way of detail about precisely what functions, how many staff and how much business these offices will handle.
Just in case anyone was under the mistaken impression they could take a minimalist approach to relocating functions, EIOPA has stepped in to warn firms and regulators against setting up post-Brexit shell companies that merely delegate operations back to parents in London. In doing so, EIOPA is on message with other EU institutions in seeing Brexit as an opportunity to boost EU, especially Eurozone, economies.
It published an opinion at the end of last month which said UK insurers will need to transfer significant operations to an EU office to be granted regulatory approval. This message was directed as much to any national regulators tempted to offer low key regulation and not insist on major operational functions being transferred as to insurers.
Many national regulators in the EU have responsibilities to promote the sector as well as regulate it and so attracting new business could, EIOPA fears, trump the need to follow strict regulatory guidelines. One key message to UK insurers is not to assume that any especially attractive regulatory offers will survive review by EIOPA. It warned it will monitor developments to prevent supervisory divergence - one of its abiding fears.
Gabriel Bernardino, Chairman of EIOPA, made it clear that it was aiming to nip this in the bud before it any race to the bottom gathers momentum: “The principles set out in this opinion will support the national supervisory authorities to secure sound and convergent practices linked with the authorisation and supervision of activities of insurers based in the United Kingdom and seeking relocation of activities in the 27 European Union Member States.
“Sound supervision demands appropriate location of management and key functions. Empty shells or letter boxes are not acceptable. EIOPA will continue to closely monitor the developments and any possible effects on financial stability and consumer protection applying a risk-based approach and using information collected from the national supervisory authorities. EIOPA will conduct its analysis and make use of its powers and oversight tools to support supervisory convergence through bilateral engagements with the supervisory authorities, providing opinions and initiating investigations as the need arises.”
EIOPA says local regulators “should carefully scrutinise any transfer of risks and require a minimum retention of risks from the authorised undertaking. As an indication, a minimum retention of 10% of the business written could be envisaged”.
Crucially, it has been silent on whether it expects a commensurate proportion of assets to be held in portfolios managed in the new EU domiciles and what this might mean for investment teams. It is unlikely to be enthusiastic about growing volumes of premium being collected in Euros from EU citizens and businesses through an EU-based office being transferred back to the UK and managed through London.
It stressed that outsourcing of “important functions” must be subject to the full regulatory scrutiny and “shall not materially impair the quality of governance, increase operational risk, impair the ability of supervisors to monitor compliance or undermine continuous and satisfactory service to policyholders”. How far this will impact the outsourcing or transfer back to the UK of investment activities is not clear but it is hardly likely not to be seen as one of those “important functions”.
EIOPA also expects “a level of local staff commensurate to the nature and amount of business being run from the entity”, although like so much of the rest of the Brexit fog businesses are having to feel their way through there is no clarity on what that actually means, especially in terms of the functions that need to be staffed locally and the seniority of the management that needs to be in place.
The inevitable pressure from EIOPA to manage assets through the new European offices may, of course, synchronise with the desire of EU policyholders to see their assets held and managed in the EU. That would represent a powerful alliance of regulatory and consumer pressure.