Gibraltar: A new rock for the UK insurance intermediary?

Ignore the vertiginous white cliffs and the infamous Barbary apes, and dismiss the arguments about Spanish sovereignty, but do consider the new opportunities in Gibraltar arising post Brexit for insurance intermediaries. 

Gibraltar was ceded to the British in 1713. It voted to remain in the EU in the Referendum, but now finally follows the UK out of the EU on 31 December 2020. Gibraltar insurers and intermediaries lose their EU ‘passporting’ rights as a result, but are now set to gain wider rights of access to the UK insurance market than ever before. 

Reciprocal market access between the UK and Gibraltar

Work has been going on both in the UK and Gibraltar to ensure that regulated financial services entities will have full reciprocal passporting rights, just as previously under the EU Directives. The UK Government put in place transitional provisions for Gibraltar regulated entities under the Financial Services (Gibraltar)(EU Exit) Regulations 2020 which now have an extended effect until 31 December 2021. The UK regulations came into force on 14 November 2020. 

The UK Government also published the draft Financial Services Bill on 21 October 2020 with the intention of replacing the above Regulations and augmenting the arrangements between the UK and Gibraltar. The below references are to such Bill as first published and may be subject to change as it progresses through Parliament.

The Gibraltar Government has, through a Technical Notice issued on 27October 2020, confirmed the retention of the reciprocal market access through the draft Financial Services (Passport Rights and Transitional Provisions)(EU Exit) Regulations 2019 to preserve the Single Market Access for financial services post 31 December 2020 between UK and Gibraltar. Under the previous regime, and subject to fulfilling the relevant requirements, insurers and intermediaries had full rights, either on a services basis or on an establishment basis, to operate freely between the UK and Gibraltar, and vice versa.

Further on 20 November 2020, the Gibraltar Government announced the publication of new regulations to allow EEA insurers to continue to provide specified policies to the Gibraltar market on a services basis at least for 2021. However, there is a need for such insurer to work with a Gibraltar insurance intermediary. 

Both these regulations will come into force at a date to be announced before the end of 2020.

The UK changes

In the UK, the relevant arrangements will be enshrined in Sections 22 and 23, and Schedules 6, 7 and 8. Schedule 6 sets out at length the requirements placed upon Gibraltar based persons carrying on activities in the UK, and Schedule 7 deals with UK persons carrying on activities in Gibraltar. Both are primarily concerned to ensure that persons trading in the other jurisdiction are properly monitored. Schedule 8 sets out limited rules that the FCA and PRA must not make any provision prohibiting Gibraltar based persons from carrying on their authorised regulated activities in the UK. 

The UK expectations

The UK Government has created a regime in Schedule 6 which allows it to make regulations to manage Gibraltar insurers and intermediaries so as to ensure that they cannot disturb the soundness, stability and resilience of the UK insurance markets. Inevitably, they expressly intend to protect consumers, and the operation of the FSCS. The intention is to ensure that there is complete alignment in law and practice between the two jurisdictions. 

The Gibraltar changes to the insurance intermediary laws

In Gibraltar, the Financial Services Act 2019 (FSA 2019) came into force on 15 January 2020: all 667 pages of consolidating legislation and initially 41 supporting regulations! It now gives a clear, navigable path as regards the regulation of financial services, including in relation to insurance, and the regulation of insurers and intermediaries. 

However, under such consolidated laws, there were certain practical obstacles to setting up and operating insurance brokers and MGAs in Gibraltar, although, to be clear, MGAs and brokers have always been able to be regulated in Gibraltar, and some already are. 

As from 26 November 2020, and the introduction of the Financial Services (Insurance)(Miscellaneous Amendments) Regulations 2020, subtle changes that have been made in particular, to the Financial Services (Insurance Distributions) Regulations 2020 and the Financial Services (Insurance Management) Regulations 2020 to allow a smoother setting up process and make Gibraltar a more attractive jurisdiction for MGAs and brokers to operate in Gibraltar and potentially the UK. 

Outsourcing – Gibraltar laws were surprisingly silent on the outsourcing by intermediaries to third parties of functions and services. Whilst Gibraltar has a number of experienced authorised insurance managers to whom outsourcing could occur, such managers have only been able to manage insurers. The changes to existing laws will now permit these authorised insurance managers to manage insurance intermediaries. This will allow them to offer the turnkey back office structures that we see in the UK, ensuring that each Gibraltar authorised intermediary is properly established and can fulfil its regulatory duties both in Gibraltar but where necessary in the UK too. This added flexibility removes the need for the large start-up costs that intermediaries usually incur. It also ensures that those already versed in local compliance requirements can provide those services, and allow the business producers to focus on what they do best. 

Client monies and risk transfer – UK client money rules (CASS 5) make the distinction between client monies and ‘risk transfer’ monies. Gibraltar law has now been changed to clarify this distinction and to bring it into line with the UK CASS 5 rules. The laws now state that ‘customer monies’ are excluded from the customer money rules (i.e. need to be held on trust for the customer) where there is a clear provision in the agency agreement with the insurer that this is the case. This is now parallel to the UK CASS 5 rules that there must be clear agreement with the insurer for effective risk transfer to occur, and that it is receiving such monies as agent for the insurer. The only slight difference to the UK regime will be that intermediaries dealing with retail consumers will need to notify such consumers that ‘risk transfer’ applies, and the effect that that has upon them. 

Gibraltar regulatory expectations

Gibraltar laws and regulations should not be thought of as an easy regime. As expressed by the Chief Minister Fabian Picardo during the Gibraltar Financial Services Day in London last October, it is the ‘right touch not a light touch’ regime. One, however, must always bear in mind the powers reserved to the FCA and the PRA under Schedule 6 to intervene if necessary. Observing UK conduct rules and preventing consumer harm will remain of considerable importance to a Gibraltar entity operating in the UK. 

Gibraltar regulation does offer many advantages. The Gibraltar Financial Services Commission (GFSC), the financial services regulatory body in Gibraltar, are knowledgeable about the insurance market and its dynamics, and are able to deal with enquiries and applications in a very responsive manner. It is also easier to have meetings/e-meetings with them than most other regulators in order to be able to discuss business plans and issues, and to keep them fully informed of what is happening in the business. The GFSC also encourages pre-application meetings with applicants and this helps smooth the application process when they understand the business plans and the principals behind the applicants.

Whilst Gibraltar does not have such a prescriptive regime such as the SMCR, it is expected that each intermediary must have a conduct risk framework to identify and manage its conduct risk. This needs to deal with not only its own conduct, but others in the distribution chain and authorised service providers. 

Effective conduct risk frameworks must, like in the UK, consider culture, governance, product design, sales and post-sale servicing. This may also include claims management, although this aspect will usually be dealt with by the insurer. 

Each intermediary must hold the minimum capital set out in the Financial Services (Insurance Distribution) Regulations 2020 (namely, 4% of annual premium received or projected annual premium in the coming year) in addition to financial resources that are the equivalent of 3 months’ worth of operating expenses or the level required to fund an orderly winding down of the operations if ever necessary. Obviously this amount could vary considerably according to whether one is a wholesale or retail intermediary. This very much aligns to the FCA’s own recently published expectations regarding the holding of operating cash. 

Intermediaries authorised by the GFSC will be effectively supervised by the GFSC. The intermediary will need to ensure that the GFSC can access its systems, records and other relevant information. This necessarily means that control of these operations needs to occur in Gibraltar, and hence the importance of local insurance managers now being permitted to assist with this. However, this will not remove the need for experienced local directors and also local non-executive directors to be appointed in order to satisfy the ‘four-eyes principle’ of corporate governance. However, this will not remove the need for experienced local directors and also non-executive directors (although these need not be local) to be appointed in order to satisfy the “four-eyes principle” of corporate governance. 

In terms of board members, the GFSC have expressed that it will take a pragmatic, holistic and proportionate approach to this issue, taking into account the intermediary’s size, nature and complexity of its business model and structure. There is to be no minimum or maximum number of directors on the board, but there needs to be an executive director who is approved individually under the relevant Gibraltar legislation and a local non-executive director on the board. 

The GFSC place equal emphasis to the FCA on making sure that the intermediary is able to ensure a good customer experience for consumers, and to have adequate business continuity plans. This requirement is one that the board of the intermediary consider carefully in planning its risk conduct framework.

Outsourcing to experienced insurance managers will be important to the development of the market. Continual assessment of the agent’s ability to provide the agreed services to the correct level will be required, and service standards with regular review meetings will be needed. Outsourcing to insurance managers of accounting, risk and regulatory requirements will be acceptable. However, dealing with complaints should not be outsourced, and the intermediary will need to determine how these will be best dealt with. 

Applications in Gibraltar

All applications by Intermediaries for Gibraltar permissions must comply with the requirements imposed under Part 7 of FSA 2019. This involves a considerable amount of preparation and prior consultation. It is expected that once a completed application is received by the GFSC, the relevant period of determination by the GFSC is 3 -4 months. The applicants are expected to satisfy and demonstrate that they can comply with the threshold conditions under Schedule 12 of the FSA 2019, such as:

• location of offices (in respect of insurance distribution, its registered office must be in Gibraltar and if no registered office, its head office must be in Gibraltar)
• appropriate resources (the business of the firm must be conducted in a sound and prudent manner)
• effective supervision (the firm must be capable of being effectively supervised having regard to all the circumstances)
• suitability (the firm concerned must be a fit and proper person)
• a business model (the firm’s strategy for doing business) which is suitable and compatible for the person carrying on the regulated activities and how the affairs are being conducted, continuing to be conducted in the interest of consumers, and the integrity of the Gibraltar financial system. 

Applying to operate in the UK under a cross border services basis and/or via a UK branch basis

Application by a Gibraltar licensed entity to operate in the UK will be under a new framework known as the Gibraltar Authorised Regime (GAR) which is created under the Financial Services Bill. The Gibraltar licensed entity will be required to notify the GFSC of its intention to operate in the UK, who, assuming that they consider the application to be in order and consent, then pass this to the FCA. The notification process is expected to be similar to the current EU Single Market notification, although the UK Government has expressed its intention to simplify the existing notification arrangements and it is proposing that new Gibraltar firms will be able to access the UK market within two months from the date on which the UK regulators receive the GFSC notification with all required information (including confirmation that the GFSC has given firm consent to access the UK market). The FCA will, inter alia require the following:

• The identification of the person responsible for managing the Gibraltar entities affairs in the UK, and describe such responsibilities
• Details of the UK branch structure
• Rather obliquely, such other information as it may prescribed from time to time. This can be presumed to include all other information that a UK authorised intermediary may be required to provide (especially in relation to retail consumer business). 

Undoubtedly, the outsourcing of compliance requirements (perhaps to a manager operating in both Gibraltar and the UK) will be required. 

Other considerations

Tax

Gibraltar operates on a territorial tax system. As such, any income accrued or derived in Gibraltar will be subject to a corporate tax of 10%. Assuming that a Gibraltar licence is given, the activities that gives rise to the business are deemed to take place in Gibraltar. 

Gibraltar does not generally levy taxes on capital gains. Nor does Gibraltar levy taxes on assets nor have any inheritance taxes.

There is also no withholding tax in respect of dividends in Gibraltar.

In relation to supplies of services by Gibraltar entities, there is no VAT. This is unlike the UK which only exempts a limited range of insurance services. 

Stamp duty is only payable in respect of real properties situated in Gibraltar.

Every person liable to tax in Gibraltar or who has income assessable in accordance with applicable tax legislation is required to make a full and complete return of his or her income and where there is taxable income of, his or her liability to tax for that year before 30 November immediately following the end of that year of assessment.

Every company which has assessable income in accordance with applicable tax legislation for an accounting period shall make a full and complete return of its income and where there is taxable income liable to tax for that accounting period within the 6 months immediately following the month in which the accounting period ended. Regulated entities would be required to submit audited financial statements.

UK Double Tax Treaty

It is also useful to note that UK and Gibraltar entered into a Double Taxation Treaty on 24 March 2020 although domestic Gibraltar legislation has not been passed to ratify this. 

Protected cell legislation

Gibraltar has a protected cell company (PCC) regime which allows for cell insurers to be set up under the control of the PCC’s board of directors. It is only currently used by captive insurers. It is hoped that in 2021, the PCC legislation will be extended to include allowing cells for brokers and MGAs. This will allow managers to offer integrated insurance solutions going forwards, perhaps with further alignment into the reinsurance market.

Conclusions

Gibraltar insurers already account for over a quarter of the premiums paid in the massive UK motor market. Gibraltar already has a number of brokers and MGAs actively acting in the UK. Since the announcement of the new regime in November 2019, and in anticipation of the new changes, there have been a number of applications for registration of new MGAs and insurers. 

Setting up a Gibraltar intermediary will not be for all. However, throughout the COVID pandemic, Gibraltar has remained open for business, has pushed through the changes, and now has become a viable alternative from which to base an intermediary authorised to do insurance business in the UK.

We are grateful for the input of Yvonne Chu at Hassans International Law Firm in Gibraltar for her input on the Gibraltar aspects of this note.