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Brokers and Brexit – a Q&A

  • United Kingdom
  • Insurance and reinsurance


What is the current position for UK insurance brokers?

The ability to provide insurance mediation services in EEA locations is a material part of many firms’ business models and in some circumstances generates significant revenue - there are currently some 2,760 insurance intermediaries passporting from the UK into the EEA, and some 5,730 intermediaries passporting from the EEA into the UK.

Regardless of hopes for a soft Brexit and a transition period or grandfathering, it is good business practice for firms to make arrangements for how they will operate when the UK exits the EU on the assumption that passporting rights will not survive. Firms that adopt a “wait and see” approach put significant amounts of business at risk.

Passporting – a recap

Passporting is the exercise of the right available to a financial institution authorised in an EEA member state (the home state) to carry on certain activities covered by EU legislation in another EEA member state (the host state), on the basis of the home state authorisation.  This allows an authorised firm to conduct business in one or more other host states by way of “services” (that is, services on a cross-border basis, such as over the internet, telephone or by post), or by way of a “branch” (an office or other physical presence established in the host state).

What is the impact of a ‘hard’ Brexit on passporting?

If the UK leaves the EU without joining the EEA and without a deal in place to maintain some or all of the current passporting arrangements, then passporting rights from and into the UK will cease.  This means that UK based brokers will not be authorised to conduct regulated activities within the EEA – i.e. they will not be able to advise clients, arrange/conclude contracts of insurance, collect premiums or handle claims within the EEA. 

What are the available options if there’s a ‘hard’ Brexit?

Assuming the aim is to continue the business as usual (as far as possible), brokers need to establish (1) which of its current activities can continue and which will have to cease, (2) what acceptable alternative processes and arrangements are there available to meet its objective and (3) what changes may be required to give effect to the chosen solution.

What are the first steps?

The first step will be to analyse the existing business model, including consideration of issues such as:

  • What business it carried on in other EEA jurisdictions?
  • What proportion of that business is direct, and what proportion is through producing brokers?
  • How do brokers deal with EEA clients – do they travel or are they desk-based in the UK?
  • If UK based brokers travel, to what extent are they carrying on regulated activities (this might depend on the relevant country) whilst overseas (i.e. providing advice, arranging and concluding contracts of insurance, collecting premiums and handling claims, although local law will ultimately determine what are regulated activities)
  • To what extent does the firm carry on promotional activities overseas and how much business is derived from such activities?
  • How much business results from unsolicited approaches?
  • Which are the key EEA locations for key clients?

Once this analysis is complete, the firm will need to decide whether it wishes to continue to carry on the EEA business.  Assuming that it does, it will then need to decide whether to:

  • Use an existing EEA entity to provide broking services. This may be one or more entities within the firm’s group which are authorised in the EEA, or
  • Set up a new entity in the EEA to provide the broking services.

For a number of firms it will be attractive to use an existing EEA entity, which is already authorised in its home state to provide broking services, since this will give the firm access to the EEA market and avoids the need to set up a new entity which will need to become authorised, which could take up to a year.  However, others may wish to use this as an opportunity to expand their international network through establishing new EEA entities.

What if an existing entity is used?

If there is a choice if entities, it may be possible/prudent to use more than one, depending on the classes of business and client requirements.

Local regulatory approvals are likely to have been based on a business plan which may have been limited to particular classes of business and/or category of client.  A decision to use that entity for other classes of business and clients may mean that the business will be materially different from which the regulator approved.  It may therefore be necessary to update business plans, apply for additional permissions, or in extreme situations, reapply for authorisation.

Where should any new entity be established?

There are a number of considerations to take into account when choosing where any new entity will be established.  

The local regulatory regime will be important. Some have been welcoming new business applications for authorisation, while others are making it more difficult.  Some jurisdictions have implemented the minimum EU law requirements, whereas others have gone beyond the minimum. Local regulator workload is likely to be an issue.  In some locations it is possible (or even likely) that the regulator will impose a cut-off date after which it will not process requests for authorisation or to vary permissions in time for the UK’s exit from the EU.

Staffing of the new EEA entity will be an important consideration, both in terms of staff numbers and their expertise.  It may be necessary to move some staff from the UK entity to the EEA entity and/or to recruit locally. 

Other issues will include the tax regime, availability of office space and ease of travel between the UK and EEA location.  The ability to outsource back to the UK may also be a significant factor …

To what extent will the EEA entity be able to rely on support from the UK?

In the context of insurers/ reinsurers, in July 2017 EIOPA issued an “Opinion on the supervisory convergence in the light of the United Kingdom withdrawing from the European Union”, which acknowledged that relocating and new entities in the EEA may seek to limit the impact of the relocation through extensive outsourcing of functions back to the UK. 

EIOPA has warned that firms establishing themselves in the EEA will be expected to demonstrate an appropriate level of corporate substance, proportionate to the nature, scale and complexity of the business.  EIOPA has also made it clear that it will expect to see that the administrative, management or supervisory board and key function holders present in the relevant EEA state.

While an obvious benefit of outsourcing back to the UK is to reduce the infrastructure required for the effective operation of the new EEA hub, EIOPA is clear that firms will not be allowed to deplete the corporate substance of their EEA entity such that there are repercussions on the adequacy of their management and on the effectiveness of their supervision by the relevant EEA supervisor. 

In practice therefore and applying this to intermediaries, this means that a key factor in the extent to which outsourcing will be permitted will be the retention of control by the EEA entity.  The EEA entity will be expected to retain access to data, premises, and involvement in decision making in relation to the outsourced business.  It will also be expected to be able to resume direct control over outsourced activities, should it need to do so.

For further information on outsourcing please see our briefing here [link to our briefing “EIOPA comments on Brexit and outsourcing].

What is the impact on data protection requirements?

Firms will be aware that the General Data Protection Regulation (“GDPR”) is due to come into force in the UK in 2018.  That will not change.  Accordingly, firms need to be ready to comply with GDPR by 4 May 2018.  It is highly unlikely that Brexit will have any impact on GDPR provisions implemented into UK legislation.

This is because following the exit of the UK from the EU the UK will no longer be in the “safe zone” for data protection purposes.  This means that there will need to be new procedures introduced for the transfer of data between the UK and EU.  In order to minimise the impact on UK firms with EEA business operations, the UK will need to have a regime that is as close as possible to that in force in the EU.

Of course once the new procedures are agreed and in force to deal with transfers of personal data between the UK and EU, firms will need to implement procedures to ensure they comply.

What is the likely impact on employees?

Broadly, there will be two categories of employee for consideration:

  • Non-UK EEA nationals who are residing in the UK and working for the UK entity under the current free movement of workers (“Non-UK EEA workers”) and
  • Employees of the UK firm who may be required to relocate to service the EEA business.

In the first instance the firm should carry out an audit of its employees to establish which are Non-UK EEA workers.

While the government has not announced the cut-off for Non-UK EEA workers to remain in UK, it may well be sometime in early 2019.  This is likely to have an impact on current levels of staff motivation and morale across the business.

In order to retain talent, UK firms will need to work with Non-UK EEA workers to encourage them to remain in the UK.  A key issue will be (and to an extent may already be) those individuals feeling like they are welcome and valued in the UK workforce. 

UK firms will need to do what they can to help.  This might include meetings and surgeries to help staff understand their rights and what they need to do to remain in the UK.  Firms with Non-UK EEA workers will also to apply for sponsor licences and encourage (and help with) residency applications, where needed.

In relation to UK workers who are required to relocate to service the EEA business, the first step will be to review their employment contracts to determine whether they contain mobility clauses.  However, even where there are mobility clauses, they may well be unenforceable as regards a move to another country, and firms should consider whether it is fair and reasonable to expect UK workers to move overseas (save, perhaps, in respect of relatively short term assignments).

Depending on the extent to which staffing requirements shift from the UK to the EEA firm, it may be necessary to consider redundancy situations.

How is business transitioned to the EEA Entity?

From a legal perspective, the principal issue will be whether the terms of business agreements with each client allow transfer to another entity.  If not, then variations to those agreements may be required, which will need agreement from each client.  Alternatively, transfer may be permitted with client consent.  Either way, for many brokers this will be a substantial (and laborious) task.

From a practical perspective, many clients will have a strong personal relationship with their individual broker (often this is stronger than their relationship with the firm), so there is a risk that if individual brokers can no longer provide the services that they have previously provided, some clients may move to other brokers. 

To mitigate the risk of this, the process of transferring EEA clients to the EEA firm will need to be handled carefully to minimise the risk of loss of business, and will need to be done in a way to provide comfort to the client that their interests remain paramount and will not be compromised by the change.