Insurers operating within the UK have been told they need to ensure they are ready for the impact of a no deal Brexit.
The Bank of England and the Financial Conduct Authority (FCA) have written to the CEOs of both UK firms and those which will become third country branches post 31 December to warn them of the issues they need to be aware off.
The Letter from Anna Sweeney and Charlotte Gerken (Bank of England), and Matt Brewis (Financial Conduct Authority), warned firms could not stint in their preparations for the ned of the transition period.
“It is imperative that firms continue to build on their preparatory work to ensure that they, and to the extent possible their clients, are ready for a range of scenarios at the end of the transition period,” it cautioned.
It added most risks to UK financial stability that could arise from disruption to the provision of cross-border financial services, should the transition period end without the UK and EU agreeing equivalence or other arrangements for financial services, have been mitigated.
“This reflects the extensive preparations made by authorities and the private sector over a number of years”.
“However, financial stability is not the same as market stability, and some market volatility and disruption to financial services, particularly to EU-based clients, could arise,” said the letter. “Financial institutions are continuing to make preparations and engage with clients and customers to minimise any disruption, and it is important that they continue to do so. Final steps by individual firms are required to ensure their preparedness for the end of the transition period. These actions will vary between firms and may differ between UK firms and EEA firms operating in the UK.”
While the BoE has allowed the use pf Part VII transfers of European books of business after the end of the year the EU has taken a different approach and the letter warned firms needed to be mindful of the potential issues that will create.
“The PRA wrote to firms directly in February this year in relation to contingency planning to ensure ongoing service continuity in respect of EU liabilities. Firms were requested to provide confirmation to their PRA supervisory contact that they had engaged with all relevant EU authorities. Firms intending to run-off their remaining liabilities relying on EU run-off regimes where these are available or seeking to transfer their EU liabilities to an EU-authorised insurer should ensure that they finalise preparations and implement suitable and realistic contingency plans in advance of the end of the UK transition period.
“You should proactively continue to discuss your contingency plans, as well as any associated risks with the relevant EU authorities, to ensure that they remain satisfied with them.”
It highlighted the mutual recognition framework contained in the Solvency II Directive will not apply to insurance business transfers sanctioned by the UK courts after the end of the transition period, even if they fall within the saving provision. Instead, recognition will be based on national regimes in each EEA jurisdiction. Therefore, insurers intending to rely on the saving provision as part of their contingency plans should continue to engage proactively with relevant EEA authorities.
“We expect that you will continue these efforts to address risks specific to your firm and that you will keep your supervisors informed,” said the letter. “FCA Supervisors are also following up where appropriate with specific questions about firms’ preparations through the FCA’s usual supervisory channels.”