Clarification and consolidation, but no fundamental re-write: the PRA consults on amendments to its approach to third-country insurance branches in the UK

Clarification and consolidation, but no fundamental re-write: the PRA consults on amendments to its approach to third-country insurance branches in the UK

Caveat vendor - the UK may introduce significant fines for breaches of consumer protection law

Third-country insurance branches in the UK (and overseas insurers looking to set up a UK branch) will welcome the additional guidance contained in the insurance regulator’s latest proposals. In its October consultation paper, CP21/23, the PRA confirmed that it is not proposing substantial new rules.

Instead, it is taking the opportunity to consolidate and clarify its approach on the authorisation and supervision of UK branches of third-country insurers through a new statement of policy (SoP) (which will replace the existing supervisory statement SS2/18) and revisions to supervisory statement 44/15 (plus some minor changes to supervisory statement 20/16). Feedback is sought by 12 January 2024, with the publication of proposed final policy documentation during Q2 2024.

Why are the changes being proposed?

The proposals come against the backdrop of the significant policy changes to the regulation of financial services as announced in the Edinburgh Reforms in November 2022, and the focus on reforms to the regulation of insurers known as “Solvency UK”. Opportunity for the insurance industry to provide feedback has come thick and fast: two PRA consultation papers earlier this summer sought feedback on broader reforms to the regulation of the sector (CP12/23) and on proposed changes to the way insurers “match” long-term assets and liabilities (CP19/23). Drafts of secondary legislation on certain elements of the reforms have also been made available for comment; other reforms will be effected through changes to the PRA Rulebook and other policy documents. The Solvency UK reforms are to be implemented through the remainder of this year and across 2024.   

What has shaped the PRA’s approach to revision?

The PRA’s revisions to its policy documents relating to third-country insurance branches have been informed by its experience and lessons learned in the authorisation and supervision of such branches under the Temporary Permissions Regime (TPR): following the UK’s withdrawal from the EU, the TRP enabled such branches which had previously operated under passporting rights to temporarily continue to operate whilst seeking authorisation to carry out regulated insurance activities in the UK as a third-country branch. The TRP is set to expire at the end of 2023, with the PRA having received over 180 branch authorisation applications.

The revisions are also shaped by the changes proposed in CP 12/23 in respect of third-country branches (the proposed removal of branch capital requirements and changes to reporting requirements) and the broader principles underlying those proposals of maximising reliance on home supervisors, of the importance of the financial resources of the third-country branch undertaking and of the PRA’s proportionate approach to supervision (with the accompanying objective of reducing the regulatory reporting burden).

What do the revised documents do?

The draft new SoP sets out the PRA’s approach to authorising and supervising third-country branches (i.e. branches of insurance or reinsurance undertakings that have permission to effect contracts of insurance in the UK but are not headquartered in the UK or Gibraltar). It contains most of the expectations previously set out in supervisory statement SS2/18 which remain materially unchanged, but has additional information to guide insurers on the PRA’s approach to various factors when determining, in particular, whether authorisation as a subsidiary (rather than a branch) might be more appropriate. The PRA proposes to also set out its approach to considering the implications of the reinsurance arrangements of third-country branches in this SoP. The draft SoP contains a helpful flowchart of questions designed to help a new entrant consider whether an application for authorisation as a branch or subsidiary is most appropriate.

Similarly, the PRA proposes a number of amendments to SS44/15 to clarify its approach to topics such as Own Risk and Solvency Assessment Reporting, systems of governance and senior management functions, outsourcing and operational risk, in many cases providing sign-posting to other PRA information or with the objective of reducing the regulatory reporting burden. The new content here sets out the PRA’s expectations when the branch undertaking is re-domiciled and to provide examples of circumstances in which it expects proactive notifications to the PRA to be made.

CP21/23 is relevant and will be of interest to all third-country branch undertakings and any insurance undertaking that is not headquartered in the UK or Gibraltar that is seeking authorisation to operate as a branch in the UK. The consultation closes on Friday 12 January 2024. To discuss CP21/23 or for more information, please contact Heidi Sawtell

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