Prudential Regulation Authority Rulebook

2.1

When considering applications from a firm for authorisation as a third-country branch, the PRA’s approach is anchored in its statutory objectives and includes an assessment of regulatory equivalence and the PRA’s ability to supervise an insurer that seeks to operate in the United Kingdom through a branch. The PRA considers, and needs to be satisfied that:

• the home jurisdiction’s prudential supervision regime is ‘broadly equivalent’ in an assessment of equivalence by the PRA including assessment of the home jurisdiction’s (this is not an exhaustive list):
  • regulatory framework;
  • powers;
  • supervision of individual firms and the consolidated group;
  • information sharing;
  • confidentiality; and
  • competence and independence of supervision.

(Such an assessment is likely to be linked to, but not necessarily the same as, formal determinations of equivalence in respect of Solvency II.)

• the firm is capable of being supervised effectively by the home supervisor;
• the whole firm is able to meet the Threshold Conditions;
• there is sufficient supervisory cooperation with the home supervisor;
• UK policyholders of the firm will be given the appropriate priority in an insolvency and that there is no discrimination against policyholders whose business is written in the United Kingdom in the event of a winding up;
• the firm is able to meet relevant PRA rules, including the Senior Insurance Managers Regime and, on its implementation, the full Senior Managers and Certification Regime^[4] applicable to the relevant individuals responsible for the branch;
• given the scale of UK branch activity covered by the Financial Services Compensation Scheme (FSCS), the protected amount covered by the FSCS can be absorbed by insurers liable to contribute to the FSCS; and
• the impact of the failure of a firm with a UK branch on the wider UK insurance market and financial system would not lead to broader instability.

2.2

The PRA’s approach to broad equivalence of a home supervisor, policyholder discrimination and relevant PRA regulation has been published in SS44/15 and the PRA’s approach document. The final two factors above, which will be considered in parallel to the others when reviewing an application for third-country branch authorisation or when considering the appropriate future structure for an existing third-country branch operation, are explained further below.

2.3

The PRA assesses these considerations in their totality, but emphasises the overall ‘supervisability’ of an insurer that operates in the United Kingdom through a branch. In particular, the PRA will place considerable weight on assessing the extent and quality of cooperation with the home supervisor. In performing the assessment, the PRA will balance the overall supervisability against the nature and scale of the insurance activities that the firm proposes to carry out, including those through its UK branch.

2.4

Eligible policyholders of insurers operating in the United Kingdom which are authorised by the PRA are covered by the FSCS. Therefore, regardless of whether third-country insurers operating in the United Kingdom do so through branches or subsidiaries, the potential cost to the FSCS of an insurer default would be the same.

2.5

The level of FSCS-protected liabilities is a strong indicator of the impact of failure of a branch to both policyholders and FSCS levy payers.

2.6

Levies on insurers writing FSCS-protected business are used to cover the costs of compensation. The size of these levies is limited to prevent insurers becoming unprofitable as a result of their FSCS levy obligations. The FSCS has a borrowing protocol in place with HM Treasury for access to the National Loans Fund for funding requirements in excess of these annual limits. Given this, the PRA expects a greater level of supervisory oversight for these firms and the PRA has a greater ability to mitigate risks in subsidiaries as it has access to a wider range of supervisory tools and legal powers. While not a hard threshold, the PRA expects third-country branches to have under £500 million of insurance liabilities covered by the FSCS when operating as a branch and may consider authorisation as a subsidiary as an alternative where this is not the case.

2.7

In referring to ‘FSCS-protected liabilities’, the PRA means an estimate of the aggregate gross amount of liabilities calculated by reference to protected contracts of insurance with eligible claimants. This is calculated before the application of any limits on the compensation that would be paid by the FSCS (for example where the limit of cover is 90% of the claim for certain protected contracts of insurance). The gross amount of such protected liabilities excludes any recovery that the FSCS might make from the estate of the insurer which is in default. It is also independent of the assets of the estate, including any recoveries which the insurer may be able to make under contracts of reinsurance.

2.8

The PRA will take into account the medium-term strategy, business plan and forecasts of the branch business in assessing the FSCS-protected liabilities threshold. For example, the PRA may decide to allow a firm to operate through a branch if FSCS-protected liabilities are likely to fall below the threshold in the near future. Conversely, the PRA may expect a firm to begin preparations to operate through a UK subsidiary where its FSCS-protected liabilities are currently below the threshold but the firm is projecting that they will grow above it in the near future.

2.9

The PRA is aware that the process of converting from a branch to a subsidiary requires planning and preparation, and will consider with firms a reasonable time period to restructure, where appropriate, taking into account the operational steps involved and the risks to the PRA’s objectives.

2.10

If an insurer’s FSCS liabilities are below the threshold of £500 million of FSCS liabilities, it could still, in some cases, pose a significant risk to the financial stability of the United Kingdom. The PRA will consider other relevant factors when reviewing the potential impact of a third country branch on financial stability, including the:

• availability of substitute products that would offer a policyholder a similar level of protection;
• branch’s position in the UK market, particularly assessing the size of the market share in a niche market;
• level of connectivity of a branch in the industry it operates within: for example, the extent and complexity of inter-firm transactions; and
• significance of the UK operations of the third-country branch compared to the amount of business within other jurisdictions.