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Gibraltar: A new rock for the UK insurance intermediary? ~ by David Coupe Page 18
Q4 2020 • ISSN #2165-2740 • VOL. 23 Q4 NO 10-12 • IRLETTER.COM
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Editor’s Letter • Contributors David Coupe
Editor’s Letter, Continued from page 2 the UK insurance intermediary? Page 18 Harold H. Hines Jr. (1925-1984)
and industry topics like price cycles and competition. The common denominator is the author, Harold H. Hines, Jr., who was usually the ‘smartest guy in the room’ – I know, I worked for him. Mr. Hines kept not one but two secretaries busy all the time. I remember receiving a letter from him recapping a meeting we had in New Chicago! A good number of posts that will follow are addresses Mr. Hines made to leading industry groups after he left Marsh & McLennan to join the Ryan Insurance Group and before he and Patrick G. Ryan embarked on their quest to build today’s Aon Plc. er” is emblematic of Mr. Hines’ long-standing advocacy of higher corporate visibility for risk managers. This speech was delivered to the Annual Meeting of the Chicago Chapter of RIMS in 1981; however, the message still rings true today. If Mr. Hines were still, he would be singing the same tune.
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INSURANCE RESEARCH LETTER • Q4 2020
The Blog is also available at no cost and highlights announcements, happenings and opinions from yours truly and others. Our aim is to curate the news so you don’t have to wade through it. We think of the IRL as the cure for news overload. The Resource Center provides Helpful tools for internationalists: • Telephone Codes & Times Zones Worldwide • Socio-Economic Country Information • International Insurance Glossary • International Insurance Supervisors, Regulators, Associations & Central Banks (you must pay for this) • World Travel Advisories In the you-get-what-you-pay-for department, you to 2011 available to download. ISN Market Guides by country provide detailed information on local insurance requirements including compulsory coverages, legislation, supervision, non-admitted insurance, main classes, product information, and more. The site is super-fast and has a robust search engine. Please email me with comments, thoughts or suggestions. If you have not yet subscribed to IRLetter.com, you can visit our subscription page HERE. •
David was the founder of EC3 Legal (merged with Birketts April 2020) and has been practising corporate commercial law for over 35 years, principally around the London and Lloyd’s insurance market. Prior to founding his own practice, he had been a partner at two of the best known London insurance and commercial legal practices. He advises and supports insurance brokers, underwriting agents, MGAs, insurers and other service providers, and those looking to invest in the market including venture capital funds, business angels and (re)insurers. He also specialises in insurance governance and regulation. David is a founder of the Managing General Agents’ Association (MGAA) and sits on the Board and their Regulatory and Compliance Committee and has regular contact with the UK Financial Conduct Authority (the UK regulator of brokers and insurance agents) in such capacity. David’s practice has also covered a number of transactions, transfers of business and schemes of arrangement to obtain an order under Chapter 15 of the US Bankruptcy Code. Whilst much of his work is based in the UK insurance market, he has advised many clients worldwide on insurance related matters. For instance, he has assisted many clients from the US and Bermuda with their acquisitions and transactions in the UK. He also has clients from as far away as New Zealand, Australia, China, Malaysia, Brazil and throughout the EU. Most recently, he has assisted the Government of Gibraltar with regards the changing of their laws for intermediaries. He is also dealing with many issues arising relating David is also a well-known name in the Lloyd’s market, and has acted for a number of agents and capital providers relating to Lloyd’s investments, setting up new Lloyd’s syndicates and special purpose arrangements (SPAs), and Lloyd’s corporate capital vehicles (and the provision of FAL into and reinsurance instruments, and alternative forms of risk transfer through protected cell companies and captive insurance. Email: david-coupe@birketts.co.uk Tel: +44 (0)203 553 4884
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It is anticipated that once President Biden has reviewed those actions taken by his predecessor to damage his country’s standing in the world he Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the United States which was signed on the 4th February 2016 but not yet in force). The point here is: the USA is not part of RCEP but will most likely join TTP whereas the British view that it does not need regional deals is looking increasingly “anomalous” - as The Times called it. The newspaper went on to say deals between major economies “leaves the UK as the odd one out if Britain doesn’t have deals with the likes of France and Germany via an EU deal.” At the time of writing Britain has no such deal. in the talks between the EU and the UK is Financial Services. It looks like
force on 14 November 2020. The UK Government also published the draft Financial Services Bill on 21 October 2020 with the intention of replacing the above Regulations and augmenting the arrangements between the UK and Gibraltar. The below it progresses through Parliament. The Gibraltar Government has, through a Technical Notice issued on through the draft Financial Services (Passport Rights and Transitional Provisions) (EU Exit) Regulations 2019 to preserve the Single Market Access ments, insurers and intermediaries had full rights, either on a services basis or on an establishment basis, to operate freely between the UK and Gibraltar, and vice versa.
That means that British Regulators will be in an unenviable position. If there is a Deal – but not for Financial Services - what are the terms of that
Further on 20 November 2020, the Gibraltar Government announced the publication of new regulations to allow EEA insurers to continue to
services from the 1st January 2021 onwards? If there is No Deal is Britain
for 2021. However, there is a need for such insurer to work with a Gibraltar insurance intermediary.
complicated task?
Both these regulations will come into force at a date to be announced before the end of 2020.
Another factor complicating the Regulator’s role is suspicious role of Members of Parliament and government ministries in awarding contracts during the pandemic. Companies recommended by MPs and ministers’
The UK changes
of £18 billion spent on pandemic-related contracts was awarded directly without a competitive tender process, it said. More than 8,600 coronavirus contracts had been awarded by the 31st July and PPE accounted for 80% of the contracts awarded. Surely there were rules and regulations covering the way these contracts were awarded. Someone, somewhere, needs to step in here and sort this behaviour out. Otherwise the role of Regulators has been compromised: where is the vigilance the Regulator boasted about on the 12th November?
The UK expectations
but I think they will make a pretty good job of intervening should Britain’s full departure from the European Union on the 31stDecember create disorder in markets - and the Regulator’s success won’t be thanks to the British government.”
Gibraltar: A new rock for the UK insurance intermediary? By David Coupe apes, and dismiss the arguments about Spanish sovereignty, but do consider the new opportunities in Gibraltar arising post Brexit for insurance intermediaries. Gibraltar was ceded to the British in 1713. It voted to remain in the 31 December 2020. Gibraltar insurers and intermediaries lose their EU ‘passporting’ rights as a result, but are now set to gain wider rights of access to the UK insurance market than ever before.
Reciprocal market access between the UK and Gibraltar Work has been going on both in the UK and Gibraltar to ensure that rights, just as previously under the EU Directives. The UK Government put in place transitional provisions for Gibraltar regulated entities under the Financial Services (Gibraltar)(EU Exit) Regulations 2020 which now have
INSURANCE RESEARCH LETTER • Q4 2020
In the UK, the relevant arrangements will be enshrined in Sections 22 and 23, and Schedules 6, 7 and 8. Schedule 6 sets out at length the requirements placed upon Gibraltar based persons carrying on activities in the UK, and Schedule 7 deals with UK persons carrying on activities in Gibraltar. Both are primarily concerned to ensure that persons trading in the other jurisdiction are properly monitored. Schedule 8 sets out limited rules that the FCA and PRA must not make any provision prohibiting Gibraltar based persons from carrying on their authorised regulated activities in the UK. The UK Government has created a regime in Schedule 6 which allows it to make regulations to manage Gibraltar insurers and intermediaries so as to ensure that they cannot disturb the soundness, stability and resilience of the UK insurance markets. Inevitably, they expressly intend to protect consumers, and the operation of the FSCS. The intention is to ensure that there is complete alignment in law and practice between the two jurisdictions.
The Gibraltar changes to the insurance intermediary laws In Gibraltar, the Financial Services Act 2019 (FSA 2019) came into force on 15 January 2020: all 667 pages of consolidating legislation and initially 41 supporting regulations! It now gives a clear, navigable path as regards the regulation of insurers and intermediaries. However, under such consolidated laws, there were certain practical obstacles to setting up and operating insurance brokers and MGAs in Gibraltar, although, to be clear, MGAs and brokers have always been able to be regulated in Gibraltar, and some already are. As from 26 November 2020, and the introduction of the Financial Services (Insurance)(Miscellaneous Amendments) Regulations 2020, subtle changes that have been made in particular, to the Financial Services (Insurance Distributions) Regulations 2020 and the Financial Services (Insurance Management) Regulations 2020 to allow a smoother setting up process and make Gibraltar a more attractive jurisdiction for MGAs and brokers to operate in Gibraltar and potentially the UK. Outsourcing - Gibraltar laws were surprisingly silent on the outsourc-
Europe ing by intermediaries to third parties of functions and services. Whilst Gibraltar has a number of experienced authorised insurance managers to whom outsourcing could occur, such managers have only been able to manage insurers. The changes to existing laws will now permit these authorised insurance managers to manage insurance intermediaries. This will allow suring that each Gibraltar authorised intermediary is properly established
costs that intermediaries usually incur. It also ensures that those already versed in local compliance requirements can provide those services, and allow the business producers to focus on what they do best. Client monies and risk transfer - UK client money rules (CASS 5) make the distinction between client monies and ‘risk transfer’ monies. Gibraltar law has now been changed to clarify this distinction and to bring it into line with the UK CASS 5 rules. The laws now state that ‘customer monies’ are excluded from the customer money rules (i.e. need to be held on trust for the customer) where there is a clear provision in the agency agreement with the insurer that this is the case. This is now parallel to the UK CASS 5 rules that there must be clear agreement with the insurer for
intermediaries dealing with retail consumers will need to notify such con-
Gibraltar regulatory expectations Gibraltar laws and regulations should not be thought of as an easy regime. As expressed by the Chief Minister Fabian Picardo during the Gibraltar Financial Services Day in London last October, it is the ‘right touch not a light touch’ regime. One, however, must always bear in mind the powers reserved to the FCA and the PRA under Schedule 6 to intervene if necessary. Observing UK conduct rules and preventing consumer harm will remain of considerable importance to a Gibraltar entity operating in the UK. Gibraltar, are knowledgeable about the insurance market and its dynamics, and are able to deal with enquiries and applications in a very responsive manner. It is also easier to have meetings/e-meetings with them than most other regulators in order to be able to discuss business plans and issues, and to keep them fully informed of what is happening in the business. The GFSC also encourages pre-application meetings with applicants and this helps smooth the application process when they understand the business plans and the principals behind the applicants. Whilst Gibraltar does not have such a prescriptive regime such as the SMCR, it is expected that each intermediary must have a conduct risk framework to identify and manage its conduct risk. This needs to deal with not only its own conduct, but others in the distribution chain and authorised service providers. governance, product design, sales and post-sale servicing. This may also include claims management, although this aspect will usually be dealt with by the insurer. Each intermediary must hold the minimum capital set out in the Financial Services (Insurance Distribution) Regulations 2020 (namely, 4% of annual premium received or projected annual premium in the coming year) of operating expenses or the level required to fund an orderly winding down of the operations if ever necessary. Obviously this amount could vary considerably according to whether one is a wholesale or retail intermediary. This very much aligns to the FCA’s own recently published expectations regarding the holding of operating cash.
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the GFSC. The intermediary will need to ensure that the GFSC can access its systems, records and other relevant information. This necessarily means that control of these operations needs to occur in Gibraltar, and hence the importance of local insurance managers now being permitted to assist with this. However, this will not remove the need for experienced local directors and also local non-executive directors to be appointed in order to satisfy the ‘four-eyes principle’ of corporate governance. In terms of board members, the GFSC have expressed that it will take a pragmatic, holistic and proportionate approach to this issue, taking into account the intermediary’s size, nature and complexity of its business model and structure. There is to be no minimum or maximum number of directors on the board, but there needs to be an executive director who is approved individually under the relevant Gibraltar legislation and a local non-executive director on the board. The GFSC place equal emphasis to the FCA on making sure that the intermediary is able to ensure a good customer experience for consumers, and to have adequate business continuity plans. This requirement is one that the board of the intermediary consider carefully in planning its risk conduct framework. Outsourcing to experienced insurance managers will be important to the development of the market. Continual assessment of the agent’s ability to provide the agreed services to the correct level will be required, and service standards with regular review meetings will be needed. Outsourcing to insurance managers of accounting, risk and regulatory requirements will be acceptable. However, dealing with complaints should not be outsourced, and the intermediary will need to determine how these will be best dealt with.
Applications in Gibraltar All applications by Intermediaries for Gibraltar permissions must comply with the requirements imposed under Part 7 of FSA 2019. This involves a considerable amount of preparation and prior consultation. It is expected that once a completed application is received by the GFSC, the relevant period of determination by the GFSC is 3 -4 months. The applicants are expected to satisfy and demonstrate that they can comply with the threshold conditions under Schedule 12 of the FSA 2019, such as:
be in Gibraltar) sound and prudent manner) vised having regard to all the circumstances)
and compatible for the person carrying on the regulated activities and
Applying to operate in the UK under a cross border services basis and/or via a UK branch basis Application by a Gibraltar licensed entity to operate in the UK will be under a new framework known as the Gibraltar Authorised Regime (GAR) which is created under the Financial Services Bill. The Gibraltar licensed entity will be required to notify the GFSC of its intention to operate in the UK, who, assuming that they consider the application to be in order and
INSURANCE RESEARCH LETTER • Q4 2020
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access the UK market within two months from the date on which the UK
UK market). The FCA will, inter alia require the following:
• Details of the UK branch structure • Rather obliquely, such other information as it may prescribed from time to time. This can be presumed to include all other information that a UK authorised intermediary may be required to provide (especially in relation to retail consumer business). Undoubtedly, the outsourcing of compliance requirements (perhaps to a manager operating in both Gibraltar and the UK) will be required.
Other considerations Tax Gibraltar operates on a territorial tax system. As such, any income accrued or derived in Gibraltar will be subject to a corporate tax of 10%. Assuming that a Gibraltar licence is given, the activities that gives rise to the business are deemed to take place in Gibraltar. Gibraltar does not generally levy taxes on capital gains. Nor does Gibraltar levy taxes on assets nor have any inheritance taxes. There is also no withholding tax in respect of dividends in Gibraltar. In relation to supplies of services by Gibraltar entities, there is no VAT. This is unlike the UK which only exempts a limited range of insurance services. Stamp duty is only payable in respect of real properties situated in Gibraltar. Every person liable to tax in Gibraltar or who has income assessable in accordance with applicable tax legislation is required to make a full and complete return of his or her income and where there is taxable income of, his or her liability to tax for that year before 30 November immediately following the end of that year of assessment. Every company which has assessable income in accordance with applicable tax legislation for an accounting period shall make a full and complete return of its income and where there is taxable income liable to tax for that accounting period within the 6 months immediately following the month in which the accounting period ended. Regulated entities would be required
UK Double Tax Treaty It is also useful to note that UK and Gibraltar entered into a Double Taxation Treaty on 24 March 2020 although domestic Gibraltar legislation has not been passed to ratify this.
Protected cell legislation Gibraltar has a protected cell company (PCC) regime which allows for cell insurers to be set up under the control of the PCC’s board of directors. It is only currently used by captive insurers. It is hoped that in 2021, the PCC legislation will be extended to include allowing cells for brokers and ing forwards, perhaps with further alignment into the reinsurance market.
Conclusions Gibraltar insurers already account for over a quarter of the premiums paid in the massive UK motor market. Gibraltar already has a number of brokers and MGAs actively acting in the UK. Since the announcement of the new regime in November 2019, and in anticipation of the new changes, there have been a number of applications for registration of new MGAs and insurers.
INSURANCE RESEARCH LETTER • Q4 2020
Setting up a Gibraltar intermediary will not be for all. However, throughout the COVID pandemic, Gibraltar has remained open for business, has pushed through the changes, and now has become a viable alternative from which to base an intermediary authorised to do insurance business in the UK. We are grateful for the input of Yvonne Chu at Hassans International Law Firm in Gibraltar for her input on the Gibraltar aspects of this note.
You can always break a promise by making a new one – a politician’s definition By George Worsley Following Boris Johnson’s victory in the election in 2019, the United Kingdom and the European Union came to an agreement concerning the UK’s withdrawal from the EU. Among the many things decided in the Withdrawal Agreement was that Northern Ireland would remain in the Customs Union and the Single Market while England, Scotland and Wales would leave. The country’s previous prime minister had promised that no prime minster would ever accept that Northern Ireland would be treated
been subject to further negotiation between the EU delegation led by Michel Barnier and the UK’s Lord Frost. The deadline for these discussions to be terminated is the 31st October. The way the talks are going leads most people to resign themselves to the fact that the Transition Period is very likely to end on the 31st December with a No-deal. Because these talks have not been going well, the prime minister and his ditions of the withdrawal agreement with the EU which has led to the EU between us”. All of a sudden diplomats and the press are in agreement that to renege on an international treaty for a country like Britain which “respects the rule of law and honours its international commitments is deeply troubling and would gravely undermine its moral authority when it seeks to persuade other countries to respect their obligations under international law.” As two of Britain’s most successful prime ministers (John Major and Tony Blair) put it: “As we negotiate new trade treaties, how do we salvage credibility as ‘Global Britain’ if we so blatantly disregard our commitments the moment we sign them?” Nancy Pelosi, the Speaker of the US House of Representatives has said there is “no chance” of a US trade deal if Britain goes down this route and reneges on its commitments. You have to ask yourself, “how did we let these guys come in and run the country?” Here is the latest of some of the hot topics:
The City There is little chance now that a last minute deal will grant UK-based the Withdrawal Agreement, even the most remote chance of salvaging will be gone. Medicines A large percentage of the UK’s medical supplies comes from the EU. Red tape and uncertainties of adequate supplies getting into the UK at a time of Covid are alarming the public.
Passports Every year about 60 million Brits travel to EU countries. There had been hope of frictionless travel being agreed but this now could end in 2021. Also, people will need an International Driving Permit because the UK one