MGAs should buckle up for a ‘hard Brexit’ says Clyde and Co

Managing general agents (MGAs) will need to prepare for a “hard Brexit” as “there is no right for UK MGAs to carry out insurance distribution” in the European Economic Area (EEA), despite the confirmed Trade and Cooperation Agreement (TCA), said William Hogarth, partner at law firm Clyde and Co.

Speaking at a joint webinar hosted alongside the Managing General Agents’ Association (MGAA) last month, titled ‘Making sense of the Trade and Cooperation Agreement for MGAs and the insurance market’, Hogarth said: “In terms of what the TCA means for MGAs, it didn’t include financial services like insurance distribution.

“Effectively this means that in terms of the TCA itself, while it may have softened the hard Brexit for some industries, it’s done very little to soften the immediate Brexit for the MGA market.

“Following the end of the transition period, the freedom of services and freedom of establishment rights have ceased and it isn’t possible for UK MGAs to passport into the EEA anymore.

“For MGAs, unfortunately this is a hard Brexit and the general position is that there is no right for UK MGAs to carry out insurance distribution in the EEA.”

The EEA includes the member states of the European Union (EU) as well as the three countries of the European Free Trade Association (EFTA), which includes Iceland, Liechtenstein and Norway.

“It’s important to realise you can’t rely on any equivalence decisions to change MGAs’ ability to access the European insurance market,” Hogarth added.

“Local laws within the EEA are still important and in the context of insurance distribution, that’s particularly so because each jurisdiction within Europe has its own rules as to what insurance distribution is and how it can be affected in their jurisdiction.

“The Insurance Distribution Directive (IDD) essentially just adds a layer on top of that, but it doesn’t change the underlying local laws.”

He emphasised that UK intermediaries that provide distribution services in relation to EEA policyholders and EEA risks will need to be established and registered in the EU, in accordance with the IDD, if they wish to continue operating in this market after Brexit completes.

Reverse branching

One Brexit solution that Hogarth has seen is called reverse branching, which “allows EEA companies to have employees based in the UK who can assist with the business of the intermediary”.

He explained: “Most MGAs and other intermediaries who have the scale and volume of EEA business have been setting up their own IDD-authorised group companies within the EEA and that EEA entity they’ve set up can then utilise the passporting rights so that it can operate across the EEA.

“We’ve also seen quite extensive use of what’s known as reverse branching by these new EEA entities, whereby they’ve applied for their own UK branch.

“The reverse branching approach that many intermediaries have taken, this is often aimed at permitting UK-based staff to work for the EEA entity, normally on a secondment basis, to avoid the provision of distribution services by a non-IDD authorised entity.”

Hogarth warned that “it’s important to realise there is a fair amount of grey in terms of what’s permissible to branch back into the UK and a great deal depends on the approach of your local EEA regulator”.

However, “the key point really is how much substance must remain in the home jurisdiction of the MGA and how much can be outsourced back into the UK branch”, Hogarth added. This means that intermediaries must demonstrate their substance and cannot simply be “empty shell companies”.

Another potential solution MGAs could employ is the use of protected cell companies that have been authorised in EU member states.

Considering regulation

For Hogarth, the varying regulatory approaches across different jurisdictions is a vital consideration for insurance intermediaries and MGAs when exploring their Brexit options.

“Insurance intermediaries are regulated in very different ways across the EEA, with some really quite light touch approaches and others much more akin to what you might be used to from the FCA,” he said.

“As well as tax, corporate structure, language and other good operational considerations, regulatory considerations should have a very important part to play in deciding on jurisdiction.”

Firms that utilise reverse branching will also need to be aware of keeping “two sets of regulators happy” across territories, due to the fact they “now have another regulated entity within your group, with all the complexity that entails”.

These businesses will “need to carefully tread a line between your UK and EEA operations”, Hogarth added.

Furthermore, reverse branching could even come under fire later down the line “based on local distribution requirements across the EEA” as “different regulators may start to focus on this approach and take different views on what is and what isn’t allowed”.

Other issues that Hogarth raised included data protection and transfer, as well as employment considerations, for example staff visas and travel.

He also advised that appointed representative arrangements would need to be looked at, as these are “particular to the UK”, and that customer communications are “key” as and when businesses decide what route they are going to take.

Insurance contract continuity is a further factor to be addressed if the intermediary is unable to operate in EEA jurisdictions following Brexit.

Fellow Clyde and Co partner David Hansom, who also spoke during the webinar, emphasised that the TCA is the start of the Brexit journey rather than the end of it and that the TCA is “very light” around financial services.