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Insurance
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The Gibraltar changes to the Insurance Intermediary Laws In Gibraltar, the Financial Services Act 2019 (FSA 2019) came into force on 15th 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 financial services, including in relation to insurance, and the regulation of insurers and intermediaries. Any entity that wish to undertake regulated activities by way of business in Gibraltar will need to apply for permission under Part 7 of the FSA 2019. It will also need to comply with its sector specific set of regulations and in the case of insurance intermediaries and insurance distribution activities, it is the Financial Services (Insurance Distribution) Regulations 2020. These regulations were primarily derived from the EU Insurance Distribution Directive (IDD).
Historically, insurance intermediaries in Gibraltar were authorised and regulated under the Financial Services (Investment and Fiduciary Services) Act 1989. Although the laws of Gibraltar provided for the licensing of Managing General Agents (MGAs) and insurance brokers who wish to undertake insurance distribution activities in Gibraltar, there were certain practical obstacles to the setting up of these MGAs and brokers and to their conduct of business in Gibraltar.
The Government of Gibraltar recognises that the regulation of MGAs, in particular wholesale MGAs should be dealt with differently from insurance brokers and as a result on 26th November 2020, and the introduction of the Financial Services (Insurance)(Miscellaneous Amendments) Regulations 2020, subtle changes were 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 outsourcing 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 them to offer the turnkey back office structures that we see in the UK, ensuring that each Gibraltar authorised intermediary is properly established and can fulfil its regulatory duties both in Gibraltar, but where necessary in the UK too. This added flexibility removes the need for the large start-up 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 effective risk transfer to occur, and that it is receiving such monies as agent for the insurer. The only slight difference to the UK regime will be that intermediaries dealing with retail consumers will need to notify such consumers that “risk transfer” applies, and the effect that that has upon them.
Gibraltar regulatory expectations Gibraltar laws and regulations should not be thought of as an easy regime. As expressed by the Chief Minister Fabian Picardo, 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 regulation does offer many advantages. The Gibraltar Financial Services Commission (GFSC), the financial services
regulatory body in 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 UK’s SMCR regime for directors and managers, 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. Gibraltar, however, does have the “Regulated Individuals” regime which is similar to the previous “Approved Persons Regime” in the UK which has now been replaced by the SMCR. As such, any individual performing a regulated function (set out in Schedule 14 of FSA 2019, such as executive director, head of claims, head of underwriting etc.) must be approved by the GFSC before undertaking the said function.
Effective conduct risk frameworks must, like in the UK, consider culture, 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) in addition to financial resources that are the equivalent of 3 months’ worth 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.
Intermediaries authorised in Gibraltar will be supervised by the GFSC. The intermediary
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