The UK Government has said that it will use equivalence as one of its tools to support the facilitate cross-border trade between the UK and the European Union (and the wider European Economic Area). In an announcement on 9 November 2020, the Chancellor of the Exchequer, Rishi Sunak MP, announced that the UK proposed to recognise the equivalent status of EU financial services laws in a number of key areas.
Included in the list of equivalence decisions are the three areas where a third country can be deemed equivalent under Solvency II. The unilateral gesture from the UK to ease access to UK markets sends a signal to the EU to reciprocate with similar recognition of UK standards. The EU has not yet granted equivalence to any UK regulatory standards as the recognition of UK financial services standards (all aligned with EU rules until the end of 2020) has been part of the ongoing negotiation on a free trade agreement between the UK and the EU.
Equivalence is a mechanism to acknowledge that a third country’s regulatory standards offer the same level of protection as your own system. Under the Solvency II Directive (and the Solvency II regime implemented into UK law), there are three situations in which a third-country may be deemed equivalent in terms of the protection and oversight provided by the EU. These provisions are limited in their application and do not provide insurers and reinsurers with anything like the market access between the UK and EEA that was available under the single market passport. Article 172 determines that reinsurance arrangements entered into with a reinsurer in a third country recognised as equivalent must be treated in the same manner as contracts with an EEA reinsurer. Article 227 enables an EEA group with non-EEA subsidiaries to use local, equivalent rules for the calculation of the subsidiary’s solvency. Finally, Article 260 provides that where group supervision rules in a third country jurisdiction, such as the UK, are deemed equivalent, EEA supervisors may rely on the group supervision exercised by the third country national supervisor.
By granting equivalence to EEA Member States in these three areas the UK is acknowledging that insurers and reinsurers established in the EEA have the same capital and governance requirements as UK firms. The benefit to firms under Articles 227 and 260 is relatively limited but should avoid subsidiaries in the EEA having to calculate their solvency on the UK basis (should it move away from Solvency II) and enable the PRA to rely on the group supervision of EEA groups with a UK subsidiary. The granting of equivalence status to reinsurance arrangements under article 172 is more welcome. The decision means that reinsurance contracts entered into with reinsurers in the EEA are treated as equivalent to those with UK reinsurers and that it is not necessary for such reinsurers to retain a specified credit rating. Given the size of the European reinsurance market, this equivalence decision will enable the significant cross border reinsurance market between the UK and EU to continue. The move also sends a signal to the EU that, at least as far as reinsurance is concerned, it is in no-one’s interests to restrict access to reinsurance between such long-established markets as the UK and EU. This signal is very welcome.