Gibraltar Insurance Market: The future opportunity is upon us

Gibraltar, a tiny isthmus at the tip of Europe is already a significant player in the UK motor insurance market with almost 27% share. Post Brexit, Gibraltar has secured continuous market access to the UK insurance market. Will it be able to grab this opportunity and continue to flourish in its market share in the UK?

Gibraltar has the infrastructure, the people, the skills base, and importantly it is a sterling-based economy. UK residents do not need work permits. The COVID crisis has already proven that working remotely at great distance can really work with good technology.

Retention of the Reciprocal Market Access between the UK and Gibraltar

The confirmations provided by both the UK and Gibraltar Governments brought a much-needed lifeline for the Gibraltar financial services sector. Both Governments confirmed their respective retention of the reciprocal market access between the two jurisdictions by legislation. The Financial Services (Passport Rights and Transitional Provisions) (EU Exit) Regulations 2019 came into effect on 1^st January 2021 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. This will permit Gibraltar regulated entities to passport into the UK.

Further on 20^th 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.

The UK Government, on the other hand, 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^st December 2021. The UK Government also published the draft Financial Services Bill on 21^st October 2020 with the intention of replacing the above Regulations and introducing the Gibraltar Authorisation Regime (“GAR”) for Gibraltar regulated entities which will be underpinned by the principle that relevant law and practice of the UK and Gibraltar are sufficiently aligned.  The said Financial Services Act became law on 30^th April 2021. More details of this appear below.

Undoubtedly, going forward, the Gibraltar Financial Services Commission (“GFSC”), the UK Financial Conduct Authority (“FCA”) and the UK Prudential Regulatory Authority (“PRA”) would need to work together to align their expectations.

The Recognition of UK Laws in Gibraltar

Gibraltar’s legal system has traditionally been modelled closely to the English legal system. The English Law (Application) Act 1962 (“English Act”) provided for the applicability of common law and rules of equity from time to time in force in England would equally be in force in Gibraltar. This was subject to certain limitations. The English Act also brought certain English statutes into Gibraltar law.

When the UK became part of the EU in 1972, European Communities laws became the primary source of law in Gibraltar by virtue of UK’s membership (except on matters pertaining to common agricultural and fisheries rules and custom union). It was understandable that EU rules needed to be applied due to harmonisation of rules between the Member States for the purposes of EU Single Market Access.

Since Gibraltar has now exited the EU with the UK but continues to have reciprocal market access with the UK, will she continue to follow UK rules in order to find alignment due to single market access? It will be of interest to see the approach that the GFSC will take in respect of the new FCA proposed Consumer Duty rules.

Gibraltar insurance intermediary market

It has now been over 6 months since the Gibraltar rules on the supervisory approach for Managing General Agents (“MGAs”) were changed by legislation to allow MGAs, in particular wholesale MGAs, to be supervised differently from insurance brokers. On 26^th November 2020, the Financial Services (Insurance) (Miscellaneous Amendments) Regulations 2020 were passed which brought subtle changes, in particular, to the Financial Services (Insurance Distributions) Regulations 2020 (“Insurance Distribution Regs”) 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.

The notable changes were in respect of outsourcing and client monies and risk transfer rules.

Outsourcing – 

Gibraltar has a number of experienced authorised insurance managers, the likes of Aon, Artex, Robus and Willis. Such managers were not previously permitted under Gibraltar laws to manage MGAs or insurance intermediaries. They had only been able to manage insurers. The changes now permit these authorised insurance managers to manage insurance intermediaries. This will allow them to offer the turnkey back-office structures that we see for insurance companies in Gibraltar and 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 helps drive down large start-up costs that intermediaries usually incur. Functions such as accounting, risk and regulatory compliance can now be outsourced to local authorised insurance managers who are better informed on local regulations and in the long run, operational costs will also be lower.

Customer Monies and Risk Transfer – not be required to hold the money as “customer money” and keep it in a customer bank account in accordance with “Customer Money” rules as set out in the Insurance Distribution Regs 2020 and an intermediary may hold the money as customer money and keep it in a customer bank account only if the agency agreement expressly provides for it to be held and kept in that manner.

Following on from UK regulation, Gibraltar law has now been changed to clarify the distinction between “customer monies” and “risk transfer monies”. The changes were made to ensure that the Gibraltar rules were similar to the UK CASS 5 rules. Under the new risk transfer rules, if an MGA holds “customer money” in accordance with an agency agreement entered into with the insurer it acts for, the MGA will 

The new rules stipulate that the agency agreement must be a written agreement and expressly provide for the intermediary to hold money as agent for the insurer for the purpose of receiving premiums, settling claims and/or claims and premium refunds or any other purpose which is specified in the agency agreement and connected to the MGA’s insurance distribution activities on behalf of the insurance undertaking.

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 Gibraltar intermediaries dealing with retail consumers will need to notify such consumers that “risk transfer” applies, and the effect that that has upon them.

Gibraltar in the FinTech Space

The GFSC is the watchdog for insurance intermediaries. It has strived to remain dynamic and responsive to the insurance market and its growth into the fintech space. The first insurtech firm was licensed in August 2018 and since then a few others (the likes of Insurtech, Zego and Marshmallow) had been also granted their licenses by the GFSC to operate from Gibraltar.

The attraction to Gibraltar was primarily down to the responsiveness of GFSC and its understanding of the fintech market. Gibraltar is currently the leading jurisdiction in the fintech space.

GFSC and Speed to Market

The GFSC understood that “speed to market” was key to fintech space and therefore it needed to respond effectively to applications. Pre-application meetings with applicants were encouraged, and this undoubtedly helped smooth the application process due to the GFSC’s prior knowledge of the business plans and the applicants.

There is also a statutory obligation on the part of GFSC to process an application for insurance distribution or reinsurance distribution permission within a 3 month period.

All applications by insurance 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. 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), and
• 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; and
• fees – the firm concerned must pay such periodical and other fees as the Minister for Financial Services may by regulations prescribe.

There is now a welcomed statutory time frame to which the GFSC would need to comply with under FSA 2019 in respect of the turn-around time on insurance intermediaries’ applications.  The GFSC is now statutorily obliged to give their reply no later than 3 months to any application for insurance intermediary licence from the date of GFSC’s acknowledgement of receipt of the said application.

The Gibraltar Authorised Regime and applying to operate in the UK

Application by a Gibraltar licensed entity to operate in the UK will be under the new framework known as the Gibraltar Authorised Regime (“GAR”) to be created under the new UK Financial Services Act. The finer details have not been released since the passing of the said Act in the UK. However, from the consultation papers, the Gibraltar licensed entity will be required to notify the GFSC of its intention to operate in the UK, who, assuming that it considers the application to be in order and consent, then pass this to the FCA.

The notification process is expected to be similar to the former EU Single Market notification, although the UK Government has expressed its intention to simplify the existing notification arrangements. 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 the 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 entity’s affairs in the UK, and describe such responsibilities;
• Details of the UK branch structure; and
• Rather obliquely, such other information as it may prescribed from time to time. This can be presumed to include all other information that a comparable UK authorised intermediary may be required to provide (especially in relation to retail consumer business).

 The UK Consumer Duty Consultation

One example of what Gibraltar entities may in future need to take account of is a new duty to consumers. The FCA has also recently published a consultation paper on higher level of consumer protection in retail financial markets (“Consumer Duty”) and the proposals from the FCA relate to products and services sold to “retail clients”. The consultation applies to all regulated UK industries not only insurance. The term has been widely defined and potentially captures all individuals and SME commercial clients. It importantly extends to firms that do not have a direct relationship with the end customer. The new “Customer Duty” rules would see regulated firms being asked to put themselves in the shoes of their customers and to ask the following questions:

• Would I be happy to recommend my firm’s products and services to my friends and family?
• Would I be happy to be treated in the way my firm is treating its customers?
• Are the products fit for purposes and fair in value?
• Are the customers able to make and act on well informed communications?

Responses to the consultation must be made by 31^st July 2021, and it will be interesting to see how the different relevant UK regulated industries respond to it, and what will eventually emerge from the FCA.

Extension of the Protected Cell Companies 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.

Grasp the Nettle

It is truly an exciting time for the Gibraltar insurance industry. However, if one is to take advantage of the opportunities, understanding the changes in UK laws and regulations will be critical.

The opportunity is there – are you ready for it?