The Part VII transfer has emerged as a key element of the toolkit for Brexit restructuring, enabling your organisation to move books of business into new or existing Continental entities. Yet with time running out to secure approval and potential bottlenecks ahead, prompt action and rigorous preparation are critical. Fortunately you don't have to do it all on your own.
The UK is set to leave the EU in March 2019. Yet the outcome of negotiations is still far from clear, as highlighted by Sam Woods, Deputy Governor for Prudential Regulation, in his recent address to the City - “the EU’s position on transition is not yet clear – despite some obvious risks to EU financial stability in its absence.”
While a lot of the focus has centred on how UK insurers can continue to underwrite new business within the EU if they lose their current ‘passporting’ rights, or vice-versa, there’s also a lot of uncertainty over how insurers service existing customers. Key questions include whether it would be legally possible to settle EU claims if the business is still administered and supervised within the UK and in the absence of a local Member State licence (in line with local legislation).
Using a Part VII transfer to move Continental customers’ policies to a new or existing EU-based carrier offers an effective and clear-cut way out of this legal and regulatory minefield. We will focus here on the UK mechanism but it works the other way around too. EU insurers can use their own Insurance Business Transfer mechanism, overseen by their local regulator, to move UK business into a UK entity.
We’ve seen a surge in interest in the Part VII option as the date for withdrawal from the EU moves ever closer. Yet there are plenty of hoops to get through to secure regulatory and court approval. So how can you make the most of what may be a brief window of opportunity?
1/ Move now
The necessary review by an independent expert (IE), policyholder consultation and regulatory scrutiny can take at least a year. With no indication that EU recognition of UK Part VII transfers will continue after March 2019, there is therefore at the time of writing less than six months to get applications in train. Indeed, you should already have informed the Prudential Regulation Authority (PRA) of any plans to carry out a Part VII transfer as part of your Brexit contingency plans submitted earlier in the year and be well on track in terms of preparation.
2/ Conduct is as important as security
The PRA takes the lead regulator role on Part VII applications and will major on policyholder security (e.g. capital, reinsurance etc.). But you will also need the go-ahead from the Financial Conduct Authority (FCA), whose distinctive focus includes the impact on competition and market integrity as well as the adequacy of consultation (with counterparties as well as policyholders) and the suitability of the IE agreed in conjunction with the PRA. Further hurdles include review by the local regulator in the jurisdiction into which the business is being transferred.
3/ Solid preparation is the key to getting through the bottlenecks
With regulatory resources stretched, it is inevitable that the applications that are in the best shape will be quickest to be approved. The FCA, PRA and some EU local regulators simply may not have time to work with those whose submissions have gaps and weaknesses and are struggling to keep to timetable, risking being consigned to the back of the queue. The need for thorough preparation includes identifying and addressing any areas that might be open to legal challenge.
It’s also important to take account of the pressure on IEs and legal representatives. As we know from our own IE work, the tight independence criteria (e.g. no audit, reserving or capital advisory relationship) mean that your choice of IE may be limited and therefore their availability may need to be fully factored into your plans.
4/ Capital is critical
The need to maintain separate entities in the UK and EU may well increase capital demands and compliance costs, especially if diversification benefits are eroded. Key questions include how the transferred business will be capitalised, what authorisation within the new jurisdiction will be needed and how to optimise capital efficiency (e.g. standard formula, internal model or undertaking-specific parameters)? How much capital needs to be transferred to the EU carrier and at what point might excess capital be extracted?
If you have an approved model you may need to go through a model change process with the PRA, not to mention a new model approval application with your EU regulator. Each of these require rounds of updated documentation and model validation. Further considerations include the potential for taxable gains and VAT liabilities as well as the potentially different accounting treatment for transferred business under IFRS 17.
So there’s a lot to do, and not much time to do it in. And clearly a Part VII transfer needs to fit into wider plans for operating in a post-Brexit market. Yet moving now to capitalise on the Part VII opportunity will provide a valuable foundation for business continuity and competing in EU markets.