Intelligence: EU Trading - Doing business in Europe

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With no post-Brexit equivalence or passporting regime available to UK brokers, they have had to explore other avenues to continue to trade across the European Union. David Worsfold explores the options open to intermediaries and the benefits they can bring.

Brokers with European clients or UK clients with European risks have been forced to face up to some difficult decisions in the wake of the UK’s departure from the European Union. The Freedom of Services or passporting regime that allowed easy trade across borders for financial services never even featured in the final phase of Brexit negotiations. The choices for brokers now range from letting the business go, to exploring continental partnership options, or biting the bullet of investing in a fully authorised subsidiary based
in the EU.

What is not on the table is the option of waiting for mutual recognition of broker and intermediary regulations, the so-called equivalence regime. This will not be available to UK brokers
(see box opposite), although the Financial Conduct Authority has offered access to the UK to financial services business, including intermediaries, regulated in the EU. This is a way of sticking an ‘open for business’ sign on the UK but is not something the EU is in any hurry to reciprocate.

This has forced UK brokers to look at other options that do not depend on the shifting sands of political negotiations or regulatory alignment.

So, with passporting dead and buried and equivalence an illusion, what are the choices for UK brokers?

The major multi-national brokers have been able to take this in their stride as they already have branches authorised in a range of domiciles. They may have to transfer the management of risks and accounts between the UK and EU branches but for the clients it will appear largely business as usual.

For the rest, the choices are varied and not without their downsides. They range from low-key partnership arrangements with European brokers through membership of one of the many international broker networks, to investing substantial sums in new subsidiaries in Europe.

Brokers with a minimal amount of EU business might be tempted into informal arrangements with a broker local to where the business originates, but this carries risks. Although there is a period of grace for one year to run-off existing policies, all renewals and mid-term adjustments will fall under the new regime. Once that happens the business falls under the control of the local broker, effectively slipping away from the UK broker, making it an unattractive option.

Networks offer more protection and potential benefits, although they differ greatly in what they offer. Some are little more than a directory of brokers in different territories, while others act more as clearing houses, vetting members and imposing standard terms of business that offer protection and reassurance to the originating broker, as well as the prospect of business coming in the other direction.

The equivalence illusion

Most of the UK’s financial services sector might be waiting with increasingly furrowed brows on the outcome of the snail’s pace negotiations between the UK and European Union on equivalence but the potential benefits of a deal on this are illusory as far as brokers are concerned.

“Equivalence has always been a red herring”, says Steve White, British Insurance Brokers’ Association CEO.

“Whether it is deal or no deal it would be a ‘no use to us deal’,” he adds.

This is because the EU rules covering intermediaries in the Insurance Distribution Directive do not contain any provisions to allow access to the EU and wider European Economic Area market for any third country (the status the UK now enjoys) based on an equivalency decision by the European Commission or the European Insurance and Occupational Pensions Authority, the pan-European regulator.

Other EU directives covering financial services, including those on Solvency II, give the EU the option to assess the UK regulatory regime as equivalent to the prevailing rules in the EU, which would then permit UK businesses limited access to EU markets. This would still fall short of the passporting regime that UK firms traded under following the creation of the single market in 1992. This option was taken off the table when the UK government decided not to retain membership of the single market during the Brexit negotiations. 

EU cushions

“This is one of two EU cushions. The other is establishing an operation in the EU. For many brokers with a few European clients the economics of setting up in the EU just don’t work for them”, says Steve White, CEO of the British Insurance Brokers’ Association.

The subsidiary option is not a simple choice either, as David Sparkes, Biba’s head of regulation, explains: “Is it a branch of a UK company or a fully-fledged subsidiary company? A branch will only be able to operate in the state in which it is authorised whereas a subsidiary will be able to passport throughout the EU.”

It is not cheap or easy to set up a subsidiary or a branch as the pan-European regulator, the European Insurance and Occupational Pensions Authority has made it clear that it does not want any regulatory soft spots in the 27 members states. In a series of recommendations, it made it clear that “brass plaque” operations would not be tolerated and that branches and subsidiaries in the EU have to be staffed with the appropriate management and qualified personnel.

Several brokers have chosen this route, albeit arriving from different directions.

Leeds-based W Denis Insurance Brokers has established a fully-fledged subsidiary in Lithuania, W Denis Europe UADBB, which is authorised and regulated by the Bank of Lithuania. This investment is already paying off, according to managing director Simon Thew.

“We have already had some new large EU client opportunities presented to us and this is certainly an exciting time in the evolution of the W Denis Group. The insurance market has been very supportive also,” he explains. “Lloyd’s Europe, as well as European insurers, have all been positive about this opportunity. In addition, W Denis Europe allows for the reinstatement of passporting rights throughout all EU states, and via a service agreement with our UK business, enables W Denis Group to continue working with its clients in Europe.”

The attraction of Ireland

The acquisitive Aston Lark also opted for establishing an EU subsidiary, although not surprisingly, it decided to buy its way into a market – in its case Ireland – when it snapped up Wright and Roberston Low, two well established Irish brokers, in 2019. This gives Aston Lark approximately €4m (£3.4m) of Ebitda in Ireland and, with four further deals at the due diligence stage, it is on course to reach its target of €10m Ebitda, says CEO Peter Blanc.

The drive to find an EU base started with the need to look after the 4000 clients it has in its musical instruments scheme, adds Blanc: “We took the view early on that we couldn’t take the risk of not being able to serve those clients. That started a chain of events which saw a series of opportunities come out of the woodwork.

“We now have a fully qualified Central Bank of Ireland branch alongside Aston Lark in London. We would like to have our qualified staff work on both businesses but that isn’t possible under the regulations at the moment. We have had to transfer employees from the UK operation to the Central Bank of Ireland authorised branch. You have to be a broker of scale to make this work because you cannot dual hat.”

Blanc expresses a degree of irritation at the current situation with the UK’s rolling out of the welcome mat not being reciprocated by European regulators: “The Germans could look after a client’s UK business but we couldn’t do the same for a German client.” However, he doesn’t want to see that door slammed shut: “We are better off with an open doors policy and trying to persuade the Europeans that it is in their best interest too.”

Other brokers have opted for Ireland as their base. Global Risk Partners made its first purchase there in taking a majority stake in Crotty Insurance Brokers during the autumn of 2020.

Ireland is an obvious choice with the absence of any language barriers, travel being relatively easy in normal times and a large pool of well qualified staff, especially in Dublin.

This was one of the key attractions for the recently launched and rapidly expanding McGill and Partners, says Stephen Cross, head of innovation and strategy.

“While you have plenty of choices you have to future proof your business. You can set up in Estonia and so on but you are not going to find the talent. The talent is here [in Dublin].

“We need it to be able to engage with European clients. It will be the cornerstone of our post-Brexit operation. We are aiming for $1bn (£724m) of premium income from Europe in five years so we will need to expand in Dublin.”

McGill is not a full-service broker model, but focuses on placement: “We will attempt to bring the client as close to the capital as fast as possible in the most efficient way possible. We are big believers in getting out of the way if we cannot add value. This means we do not need offices everywhere,” says Cross.

Joint Ventures

For the Seventeen Group the need to protect business from the EU that it brings to London led it to establish a joint venture with a long-standing German broker, MRH Trowe. The joint venture, London Re, is regulated and managed in Dusseldorf with a branch office in London, which has FCA approval.

This is the perfect solution for both firms, says Seventeen CEO Paul Anscombe, who is also joint managing director of London Re:

“For us it started as a defensive consideration because we have business such as motor sport and other specialist trade sectors which are pan-European but don’t need service offices in various territories.”

Before Brexit, servicing this business from the UK was easy but as that option disappeared a solution that offered full passporting rights was needed: “We had no previous footprint in Europe but now we are in the centre of Europe where regulation is relatively straight forward and we feel very comfortable.”

For MRH Trowe the arrangement offers benefits too, especially as the hard market has heightened the need to find fresh capacity for its clients, says Maximilian Trowe, the other joint managing director of London Re: “London Re enables us to counter the capacity bottlenecks of insurers existing in the EU market and to offer support to medium-sized brokers for complex risks.”

This two-way benefit is something the large networks can offer too, says Nick Smallcorn, director for corporate clients at the Clear Group, a member of the Eurobron network, which has 31 member firms with a presence in over 90 countries.

“The best way to add certainty and appropriate standards for EU clients is to have access to EU brokers through a dedicated network… There is no substitute for territorial knowledge when it comes to the EU and the dedicated service you get by working through an established EU broker.”

“I also look at it from the claims perspective… it is another advantage of having local expertise with access to loss adjusters and claims services.”

It brings benefits to the EU members of the network too, despite them currently not needing the intervention of a UK broker as far as the FCA is concerned, says Smallcorn.

“Independent European brokers similarly need access to the UK market and our local expertise and relationships can facilitate that. Presentation to the London Market is critical and that is a skill set that sits with UK brokers.”

Key role for networks

Networks have always been key, according to Brokerbility’s CEO Ian Stutz. For seven years the firm has been a member of the Trustrisk Control network run by a broker based in Hamburg and will keep that relationship following its acquisition by Clear last September.

“Freedom of Services might have given you the opportunity to write a policy and earn some income but it didn’t give the client the right solution,” says Stutz, who argues that clients with European risks need a broker that understands the local laws and legislation and can access the right expertise when needed.

“Where Brexit has helped is that Freedom of Services has been taken off the table so we no longer have to debate with the client that they need to move away from that model.” This has quickly become a selling point.

“Those risks that have lived on Freedom of Services are obviously looking for a home if those brokers haven’t got access to a network. We can, therefore, be a little bit more bullish in going out and prospecting for businesses that have pan-European operations because we feel comfortable that we have got the network to support it.”

While UK brokers navigate the best route for themselves and their clients in the post-Brexit world, they are still having to keep one eye on the debates in Europe about Freedom of Services and passporting under the Insurance Distribution Directive (see box, below).

One thing that does seem clear is that time is running out for those who haven’t plotted a course.

“This has been going on for the past two to three years and if they haven’t done what they needed to do it is too late,” says White.

Insurance Distribution Directive uncertainty

Since its inception in 2016, the Insurance Distribution Directive has lacked clarity about where the act of broking takes place and thus who should regulate it: is it where the arranger is based or where advice is received? Most EU regulators say it is where the customer is but the UK interpretation was different, focusing on where the arranger was domiciled.

Attempts to clarify this have stalled. The European Insurance and Occupational Pensions Authority and the European Commission were meant to submit reports on the application of Directive by the end of February. Because of the original late adoption of the Directive and then the Covid-19 crisis, these reports have been postponed. The Eiopa report is now expected by the end of 2021 and the Commission reports by mid-2022 at the earliest.

In the meantime, Bipar – the European Federation of Insurance Intermediaries – has said it will carry out and publish its own research on the implementation and operation of the IDD in the EU and UK by the end of this year. 

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