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Post-Brexit structuring of insurance broking firms

News Article

Publication date:

14 October 2019

Last updated:

14 October 2019

Author(s):

Policy and Public Affairs

Will insurance brokers need to restructure their operations once the UK leaves the European Union?

There are just over two weeks to go before the UK is scheduled to leave the European Union. In the time left between now and 31st October, there is still a lot to do regarding finalising a deal as well as how to prepare for a no-deal scenario.

Regardless of the type of deal obtained, broking firms will still need to adapt to the changes occurring around them, with one option being to restructure their business. There are of course many ways to restructure a business and many ways to restructure within Europe. As such, there isn’t one model solution that will suit all broking firms, as everyone’s operations and requirements are different. Establishing an EU presence is a potential solution that many firms are either considering or have already started implementing.

14th October 2019 marks the day that UK Parliament reopens, led by the Queen’s Speech. This occurs during a period of uncertainty where Boris Johnson was recently appointed as Prime Minister but suspended parliament, still without securing a deal. After this initial session, the EU Leaders will meet before a proposed session on 19th October, the first time the government has met on a Saturday in over 30 years. It will be decided during this session if the Prime Minister will ask the European Union for another extension to Brexit under the Benn Act, if no deal has been approved by Parliament and have not agreed to a no-deal situation.

On 19th February 2019 the European Insurance and Occupational Pensions Authority (EIOPA) issued a press release requesting National Supervisory Authorities to minimise the downside to policyholders and beneficiaries in the case of no Withdrawal Agreement. In it they explained NCAs should ensure an orderly run-off of the insurance business, including the appropriate supervision, and that UK insurance undertakings without EU authorisation should not conclude new insurance contracts.

Amongst the nine Recommendations were those covering:

  • authorisation of third-country branches;
  • co-operation between the NCA;
  • communication to policyholders and beneficiaries to distribution activities;
  • lapses of authorisation;
  • orderly runoff;
  • portfolio transfer; and
  • change in the habitual residence or establishment of the policyholder.

The Association of British Insurers (ABI) also observed that the European Union are undergoing a review of Solvency II without any UK input. Therefore potentially resulting in UK insurers having to hold more capital than they need and become Rule Takers. Financial services have not been part of the proposed Withdrawal Agreements so far. As far as insurance companies and brokers are concerned, it is business as usual and most want to continue trading with the EU.

UK insurance firms will not be able to continue to trade in European countries without an EU authorisation. This is why restructuring operations across Europe is one solution that many firms have considered so that they are already prepared. If doing so, the roles and responsibilities of any restructuring must be clearly understood. Will a UK branch count as an entity as part of a VAT group if its functions include admin and accountancy? It needs to be understood where a VAT charge will apply and where it doesn’t. Transfer pricing also needs to be benchmarked to verify costs and income. Issues such as transfers, visa renewals and social security numbers may also need to be addressed according to local jurisdiction.

It will be important to have a physical presence in Europe as it will be good for Europeans who want to do business in the UK as well as maintaining passport rights for branches based in European countries. Several European cities already have an established insurance history which firms can benefit from in terms of understanding local regulation. Shares and securities will continue after 31st October, however firms will need to justify where there profits will end up. If money is being transferred from the UK to Europe, the location of the money will need to be identified, what will be done with it an whether it will be subject to a corporate tax charge.

The corporation tax challenges presented will include exit taxes when EU Tax Directives cease to apply and gains become taxable. Any ongoing operations if there is a movement of business will be subject to service agreements, transfer pricing, local taxes and EU reporting requirements. Some countries will apply a 15% tax withholding rate while and operations will need to be separate so that they won’t also be caught under UK tax too. Therefore it is important to know the local VAT rules so that it can be determined precisely what is being transferred.

If there is a no-deal Brexit then trade agreements and customs charges will still need to be determined. The fate of ‘right of recovery’ of VAT is similarly unknown as it was still not resolved when Parliament was originally suspended. But if broking firms wish to continue trading with Europe, the actual activity in EU countries needs to be established so that anything being transferred (whether it’s mobility of labour or profits) is identified. A workable structure should then revise the valuation, outsourcing agreements and proposed structure. This should help maintain client confidence that any restructuring is compliant with local regulation as well as utilising the availability of any local expertise.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.

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