Post-Brexit ‘three-way strategy’ for the Gibraltar insurance sector explained.

The European Commission last week published a notice to stakeholders on the UK’s (and consequently Gibraltar’s) withdrawal from the EU and EU rules in the field of insurance and reinsurance. A copy can be found here: https://ec.europa.eu/info/sites/info/files/180208-notice-withdrawal-uk-insurance_en.pdf

The clear message from the European Commission is that doing nothing is not an option. We are increasingly being asked about what we consider the options open to companies are. I set out below questions and answers to some of the immediate issues relevant to this subject-matter.

Why would some insurance companies need to leave Gibraltar?

For the same reason as other financial services businesses in the UK that rely on EU ‘passporting’ (i.e. the ability to undertake business on a cross-border basis from one Member State to another without the need for a separate licence – this is known as the “EU passport”). On the UK’s exit from the EU (March 2019) unless there is an agreement for a longer transition period or a trade deal between the EU-UK to cover the Single Market, insurers and other financial services companies will no longer be able to use their ‘passporting’ rights. If a company has profitable business in the EU or even undertakes most (if not all) of its business in Europe, it clearly needs a solution to continue trading post-Brexit. Gibraltar is impacted fully by this because Gibraltar is part of the EU by virtue of UK membership. So Gibraltar companies also have to consider their post-Brexit options to ensure they have continued access to the European (non-UK) market, much in the same way as companies with passporting rights based in London do.

What are the options?

There are really two main options for Gibraltar companies seeking to protect their European business. The first is to set up a new licensed company within the EU while retaining their company in Gibraltar for UK and international business. The second option for companies that do not wish to undertake UK or international business, say because it is a small part of their existing portfolio, or they simply have none, is to redomicile to another EU member state.

There are many cases of re-domiciliations between jurisdictions worldwide. The process is not new to Gibraltar either. Over the years a number of companies have re-domiciled in and out of Gibraltar. We have re-domiciled companies from Malta, Bahamas and the Channel Islands to Gibraltar and have also redomiciled companies from Gibraltar to Luxembourg, Malta, Bermuda, BVI and even Spain.

A company re-domiciled outside Gibraltar remains the same legal entity and is treated as having continued its corporate existence in the other state. Redomiciliation means that the company leaves one jurisdiction, establishes its new domicile in another and continues trading like before. There is no need to liquidate, or to portfolio transfer, or set up a new company.

The redomicilaition of an insurance company from one jurisdiction to another involves two separate but connected processes. The first is an application for an insurance licence to the regulator of the new domicile.  This would ordinarily be the same process as a new licence application, namely submission of appropriate documentation together with the business plan and details of directors and scheme of operations. The second, following in-principle licence approval, is the submission of the technical paperwork involving shareholder/directors meetings and registration of documentation with the Companies Registry in each domicile (i.e. the new domicile registers the company locally and the former domicile deregisters it). At the same time, the company ceases to be licensed and regulated in one domicile and is issued with a new licence and hence regulated in the new domicile.

There have been at least four instances of insurance company redomiciliations in or from within Europe.

Is Malta an attractive alternative location?

Malta is a small but established European insurance domicile. I visited Malta a number of times last year to explore this option. Malta shares many similarities with Gibraltar. The system of law is not entirely dissimilar and the authorisation process and prudential regime in insurance are very similar. The corporate tax regime is relatively straight-forward and has withstood scrutiny from the European Union.

I could also see that there were potential wins for Gibraltar since there are several Maltese based insurance companies that currently passport into the UK but will not be able to do so post-Brexit, whereas Gibraltar companies should be able to.

In short, the plan was that Gibraltar companies doing EU business need an EU solution (hence Malta) and Maltese companies doing UK business need a Gibraltar solution – this is what I have been referring to as my “two way strategy” for Malta and Gibraltar. It has received extensive coverage from the insurance press internationally. The strategy is well underway and one Maltese insurer has already recently redomiciled to Gibraltar.

Is there a possible Spanish option?

I am now exploring the possibility of Gibraltar insurers that require a post-Brexit EU solution moving their corporate seat to Southern Spain, more specifically La Linea just across the Gibraltar frontier. It is an option I am investigating given that some companies might, for whatever reason, prefer a Spanish solution rather than a Maltese one.

We must bear in mind that this is about helping Gibraltar insurers that require an EU domicile post-Brexit; in other words, companies that need to relocate (i.e. they must) to an EU territory to continue to trade in the EU in a Hard Brexit scenario.

There are Gibraltar insurers that might still prefer Malta, but equally there are insurers that might find relocating to La Linea attractive, especially those with an existing infrastructure in Gibraltar (i.e. employees and office), since the ‘corporate seat’ would only need to ‘move’ a few hundred meters across the border into La Linea. This is a unique situation within the EU. The City of London is not only located in an island (Great Britain) but is also separated by some distance from the rest of Europe (necessitating air-travel or train journey). So no company in Europe (needing to do business with the UK) or based in the City of London (needing to do business with the EU) could simply relocate to walking-distance across a border with the other.

EIOPA (the European insurance and pensions regulator) would not permit an EU insurer to ‘outsource’ the insurance activities (i.e. claims handling and underwriting) back to Gibraltar (as opposed to back-office insurance and claims administration) on the basis that this would undermine corporate substance of the EU entity and that Gibraltar (as indeed the UK) will then be a third-country (i.e. no longer part of the EU Freedom of Services and Freedom of Establishment regime). Instead, Malta adopts the Insurance Manager outsourcing model whereby local insurers are allowed to be ‘managed’ by international captive management firms based in Malta without a local infrastructure of their own. The absence of local employees in insurance undertakings, however, is itself now coming under increasing scrutiny from EIOPA. But in a Gibraltar-La Linea scenario, there is no outsourcing of any of the insurance functions. Instead employees could split their time between Gibraltar and Spain. Whilst employees cannot travel to Malta on a day to day basis, they can cross the Gibraltar frontier as often as necessary.

The Spanish option retains jobs and economic activity in Gibraltar whilst also creating employment and generating tax revenues for La Linea. For self-managed insurance businesses it could be cost neutral (there may even be savings) when compared to Malta as the cost of renting office space (and other incidental costs) in La Linea would be offset against Insurance Managers’ annual fees payable in Malta as well as cost of travel/accommodation. Further, if some of the same Directors resident in Gibraltar can continue, the Spanish option would result in less disruption for the company.

At the end of the day the relative merits of both territories (Malta and Spain) will depend on the business needs of the individual companies in question as well as the regulatory and tax regimes in each. Both jurisdictions apply, to a large extent, the same Solvency 2 rules as currently apply in Gibraltar. A redomiciliation to Malta no doubt has the advantage of being tried and tested. On the other hand, there has never been a redomciliation of a financial services company from Gibraltar to Spain (although some years ago I did help to establish the first branch of a Gibraltar company in Spain and that was a smooth process). Spain has the benefit of being a large Member State of the European Union and susceptible to less external pressure than Malta, including from foreign regulators. For similar reasons European brokers may prefer its insurer to be based in Spain rather than Malta. Spain also has the advantage of having a much larger European workforce with none of the limitations faced by Malta as an Island.

If the Spanish option works for a Gibraltar insurer, could it also work in the future for a London based insurance business seeking to undertake European business by setting up a new underwriting subsidiary based in La Linea (as EU territory) with ‘Gibraltar Insurance Manager’ support within 20 minutes walking distance, such that experienced and specialist staff based in Gibraltar can travel back and forth through the frontier? Gibraltar Insurance Managers’ include international firms Aon, Artex, Robus and Willis and they clearly also have the specialist staff to service the back-office needs of any clients across the border.  And what about insurance intermediaries and other financial services firms? Further, if it works for them what about back-office operations for other sectors?

‘Three-way strategy’?

The Maltese and Spanish options are not in competition with each other. They simply provide possible solutions for companies with different commercial objectives. But when taken together they can be executed as part of a ‘three-way strategy’ that maximises the Brexit opportunities for all three – Malta, La Linea (Spain) and Gibraltar.

None of these issues, however, are straightforward and will require careful assessment and expert advice. Companies will need to take decisions soon and implement their post-Brexit strategy in the time available to them.

Nigel Feetham is a partner at Hassans (a Gibraltar law firm) and a former Visiting Professor at Nottingham Law School, Not­tingham Trent University, England. Nigel is also the author and co-author of a number of law books, including ‘‘Protected Cell Companies: A Guide to their Implementation and Use”, the leading reference work on protected cell companies, which was also cited by the judge in the US Federal Court (Montana) decision of PAC RE 5-AT v. AMTRUST NORTH AMERICA, INC., No. CV-14-131-BLG-CSO (D. Mont. May 13, 2015).

This note is for information purposes only and does not constitute legal advice.

Author – Nigel Feetham,16 February 2018