Insurance reciprocity for Gibraltar and the UK
By David Coupe, Partner, Insurance and Corporate, at City based Birketts LLP EC3 Legal
The Spanish and the French have many things in common: great wine; good food; and fabulous holiday destinations. However, they share something more: the views from their borders. The Spanish have gazed longingly at the imperious white towering limestone monolith of Gibraltar, and the French have equally gazed over the imperious white cliffs of Dover. However, with BREXIT now completed, their respective holds over Gibraltar and the UK have been significantly diminished, if not totally dashed on the rocks. Gibraltar and the UK have gone their own way.
BREXIT has already created many difficulties – and will no doubt create many more going forwards. It will also create many opportunities and recognising and seizing these opportunities will define the success or failure of BREXIT. The EU door shut on 31st December 2020 to many financial services provided by Gibraltar and the UK, with passporting and other rights effectively terminated except for relatively limited purposes. However, as between the UK and Gibraltar, the future to grow wider links has considerably expanded. The UK has guaranteed the Gibraltar based entities will have entry to the UK financial services market, with Gibraltar reciprocating.
Reciprocal market access between the UK and Gibraltar
Work has been going on both in the UK and Gibraltar to ensure that regulated financial services entities will have full reciprocal passporting 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 an extended effect until 31st December 2021.
The UK Government also published the draft Financial Services Bill on 21st October 2020 with the intention of replacing these regulations and augmenting the arrangements between the UK and Gibraltar. The following references are to such Bill as first published and may be subject to change as it progresses through Parliament.
The Gibraltar Government has confirmed the retention of the reciprocal market access through the draft Financial Services (Passport Rights and Transitional Provisions)(EU Exit) Regulations 2019 which came into effect on 1st January 2021 to preserve the Single Market Access for financial services post 31st December 2020 between the UK and Gibraltar. Under the previous regime, and subject to fulfilling the relevant requirements, 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.
Further on 20th November 2020, the Gibraltar Government announced the publication of new regulations to allow EEA insurers to continue to provide specified policies to the Gibraltar market on a services basis at least for 2021. However, there is a need for such insurer to work with a Gibraltar insurance intermediary.
The proposed UK changes in the Financial Services Bill
These are dealt with in 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 expectations
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 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 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 non-executive directors (although these need not be local) 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 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 c3-4 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:
(a) location of offices (in respect of insurance distribution, its registered office must be in Gibraltar and if no registered office, its head office must be in Gibraltar);
(b) appropriate resources (the business of the firm must be conducted in a sound and prudent manner);
(c) effective supervision (the firm must be capable of being effectively supervised having regard to all the circumstances);
(d) suitability (the firm concerned must be a fit and proper person), and
(e) a business model (the firm’s strategy for doing business) which is suitable and compatible for the person carrying on the regulated activities and how the affairs are being conducted, continuing to be conducted in the interest of consumers, and the integrity of the Gibraltar financial system; and
(f) fees – the firm concerned must pay such periodical and other fees as the Minister for Financial Services may by regulations prescribe.
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 consent, then pass this to the FCA. The notification process is expected to be similar to the current EU Single Market notification, although the UK Government has expressed its intention to simplify the existing notification arrangements and it is proposing that new Gibraltar firms will be able to access the UK market within two months from the date on which the UK regulators receive the GFSC notification with all required information (including confirmation that the GFSC has given firm consent to access the UK market). The FCA will, inter alia require the following:
(a) The identification of the person responsible for managing the Gibraltar entities affairs in the UK, and describe such responsibilities;
(b) Details of the UK branch structure; and
(c) 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.
Proposed amendments to the Protected Cell Companies 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 MGAs. This will allow managers to offer integrated insurance solutions going forwards, perhaps with further alignment into the reinsurance market.
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 participating in the UK markets. 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. 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, signed a beneficial tax treaty with the UK, and now has become a viable alternative from which to base an intermediary authorised to do insurance business in the UK.