Introduction

As part of its planning for a no-deal Brexit, on 30 November HM Treasury published a draft of the Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2018 (the “Draft Regulations“), which have been laid before Parliament, along with explanatory information.

The Draft Regulations will take effect on exit day in the event of a no-deal Brexit. They will amend the UK’s implementation of Solvency II provisions on reorganisations and winding ups of insurers in two ways. First, they will remove the present prohibition on such proceedings being brought in the UK against EEA insurers. Second, they remove the current reciprocal recognition of insolvency proceedings taken in other EEA states.

The present legal framework

Title IV of the EU Solvency II Directive grants exclusive jurisdiction (except in limited circumstances) over insolvency proceedings against insurers to the EEA state which authorised the insurer. It also provides for EEA-wide automatic recognition of measures taken in such proceedings.

This framework is implemented in the UK by the Insurers (Reorganisation and Winding Up) Regulations 2004 (SI 2004/353) (the “Regulations“) and, in respect of the Lloyd’s market, by the Insurers (Reorganisation and Winding Up) (Lloyd’s) Regulations 2005 (SI 2005/1998). The Regulations prohibit (except in limited circumstances) reorganisation and winding up proceedings from being brought in the UK against insurers which are authorised by another EEA state. They also provide for the automatic recognition in the UK of measures taken in such proceedings in another EEA state.

The Regulations also contain ancillary requirements implementing Solvency II, such as notification of proceedings to other EEA regulators, publication of orders in the Official Journal of the EU, and application of another EEA state’s laws in limited circumstances.

The impact of the Draft Regulations

As the exclusive jurisdiction and automatic recognition framework will not work if the UK exits the EU without a deal in place, the Draft Regulations make the following amendments.

First, they remove the prohibition against reorganisation and winding up proceedings being brought in the UK against an insurer authorised by another EEA state. This means that, following exit day, such proceedings can be brought in the UK against an EEA insurer, provided the ordinary jurisdictional and insolvency requirements of English law are satisfied. The UK government points out that the change means that a UK insurer with insurance business in other EEA states could be involved in insolvency proceedings in other EEA states as well as in the UK, which could increase any costs involved in the proceedings.

Second, they remove the automatic recognition in the UK of measures taken in such proceedings in other EEA states.

Third, they secure the smooth operation of the above ancillary requirements above by removing the requirement to notify other EEA regulators, replacing the requirement to publish orders in the Official Journal of the EU with the ordinary English insolvency law publication requirements, and further limiting the circumstances in which another EEA state’s laws must be applied.

Saving provisions

The Draft Regulations make saving provisions for proceedings in the UK against EEA insurers with UK branches which are started before exit day and which are ongoing on exit day. Such proceedings will continue to be governed by the present legal framework of exclusive jurisdiction, except where proceedings in another EEA state under exclusive jurisdiction would:

  • have an adverse effect on financial stability in the UK;
  • materially prejudice UK creditors of the insurer by the operation of the law of that EEA state, either due to the UK’s treatment as a non-EEA state or due to the different treatment of UK creditors as compared to EEA creditors with similar rights; or
  • be unlawful under section 6 of the Human Rights Act 1998, which requires public authorities not to act incompatibly with the European Convention on Human Rights.