September 2017
UK carriers looking to establish EU subsidiaries for Brexit face less room for manoeuvre after the European Commission (EC) issued plans to bolster the bloc’s financial regulators at the expense of national watchdogs.
The EC’s proposals would give the European Insurance and Occupational Pensions Authority (Eiopa) greater powers to promote “convergence” among national insurance regulators in the way they supervise internal models under Solvency II.
Eiopa and the other so-called European Supervisory Authorities (ESAs) would set EU-wide priorities for their respective sectors and vet how national watchdogs fulfil that remit.
The plans, part of the EU’s three-year-old Capital Markets Union project, elicited some accusations of a regulatory power grab, while Insurance Europe called for clarification of the proposed “material increases” in both Eiopa’s scope of activities and the new regime’s oversight mechanisms.
Mazars partner Sarah Ouarbya said that the proposed strengthening of central powers “should level the playing field even more across the EU”.
“Insurers that have chosen a country because they perceive the national regulator as being more pragmatic than others may find that advantage is lost over time,” she added.
Ouarbya also noted that references in the EC documentation to the delegation and outsourcing of business functions to non-EU countries could stymie some UK groups’ plans.
“Many banks and insurance companies are working on the basis that they will be able to delegate or outsource business functions back to the UK from their new EU hub,” she added. “These plans may be disrupted if additional barriers are put in the way and there is a distinction between EU and non-EU outsourcing.”
Herbert Smiths Freehill partner Geoffrey Maddock concurred.
“From firms’ point of view, the clear concern will be that once Eiopa has exerted greater control over this area, it will be able to make life increasingly difficult for groups who wish to retain most activities in the UK by means of reinsurance/outsourcing,” he said. “So the key will really be what actual behaviour follows from Eiopa, and whether it is reasonably based on legitimate financial stability/policyholder protection grounds or is more motivated by protectionist anti-third country objectives.”
Last week’s proposals follow edicts from the European Securities and Markets Authority (Esma) and Eiopa designed to stamp out the creation of “letterbox” entities within the EU to house UK subsidiaries.
Under the latest proposals, the ESAs would take decisions more independently from national interests, with newly created executive boards speeding up the decision-making process.
Funding of the ESAs would also be separate from the national supervisors to ensure independence.
The EC said there would be a mechanism for interested parties to appeal to the EC if a majority think the ESAs have overstepped the mark.
In issuing the proposals the EU executive abandoned the prospect of a merger of the European Banking Authority and Eiopa – a concession that Insurance Europe welcomed.
Also on the positive side, Ouarbya said that UK insurers would generally welcome more consistency in the way that internal models are validated across the EU, given the Prudential Regulation Authority’s tough reputation in this regard.
The proposals take the form of an omnibus text, which amends existing legislation.
They will now be discussed by the European Parliament and the European Council.
