The Gibraltar Financial Services Commission (GFSC) has issued guidance for Gibraltar-based firms on Brexit contingency planning, with particular focus on the event of a no-deal Brexit.
The GFSC has warned firms they should have plans in place to address any risks caused by Brexit and that any necessary changes need to be “executed appropriately and avoid any undue harm to consumers”.
With the UK’s departure date from the EU (29 March) just 10 days away and the British government still unable to come to a decision on its terms of withdrawal, the possibility of the UK leaving without a deal is impossible to ignore, despite the fact that parliament voted to rule such a scenario out.
In a statement on the 18 March, the Gibraltar government stated that in the event of a no-deal Brexit, it would be ready to leave the EU with amended legislation “to ensure a fully functioning financial services regime across all sectors”.
Gibraltar-based firms will, however, still be expected to have considered the impact of Brexit and what action, if any, is necessary.
The most impactful change will be the loss of EU passporting for firms based in Gibraltar, meaning they can no longer conduct business in other EU states.
The GFSC stated: “Firms regulated in Gibraltar should have plans in place to address any risks arising from Brexit.”
“Firms providing services into the EEA should familiarise themselves with the relevant applicable law in all jurisdictions in which they operate.”
Scenarios
Nigel Feetham, partner at Hassans International Law Firm, said both UK and Gibraltar insurers should either have implemented, or be in the process of implementing, their Brexit contingency plans.
Feetham broke down several potential Brexit contingency scenarios that insurers may undergo.
The first scenario, a portfolio transfer of EU insurance liabilities to an EU insurer, would enable the UK/Gibraltar insurer to focus on their UK and international business and allow the existing EU policyholder claims to be paid through the EU insurer.
He noted that, due to legal, regulatory, actuarial and other business costs, “portfolio transfers are expensive to execute” and “can take a substantial amount of time to complete”.
Feetham added: “some of the smaller insurers may not have the financial resources necessary to undergo a portfolio transfer.”
Secondly, an insurer may look to redomicile to another EU state.
He explained: “You can achieve this through a merger (in the case of a UK company), or redomiciling the company (in the case of a Gibraltar company).”
Redomiciling the company involves an insurance licence application to an EEA state regulator, which according to Feetham, can “take a substantial amount of time”, “is only suitable for companies that undertake EU business”, and “can obviously be disruptive”.
The third scenario is the creation of a new licensed insurer in the EU, which Feetham explained requires “separate capitalisation and a portfolio transfer from the UK/Gibraltar insurer of its EU liabilities and is therefore subject to the same limitations as the first two scenarios”.
Insurance companies that cannot undergo any of the first three scenarios would then, Feetham suggested, fall under the final scenario, which is related to the European Insurance and Occupational Pensions Authority (EIOPA)’s request for European regulators to implement transition periods for the payment of existing claims in the event of a no-deal Brexit.
EU members states are in the process of announcing these transition periods, mostly ranging between nine and 24 months.
Feetham said: “The question on the 29 March will be, what happens after the end of that transition?”
“UK and Gibraltar insurers with longer tail liabilities will obviously be hoping for further extensions, and in the case of smaller entities who may not have the financial resources for separate capital requirements in each EU territory for these books in run-off, without the need to establish fully licensed branches.”
He concluded: “Unless the EU recognises Solvency 2 ‘equivalence’ of the UK/Gibraltar regulatory regime and applies proportionality to allow an orderly run-off in full, how else could existing claims be paid and insurers continue to service existing claimants?”
