The CBC aims to improve the functioning of the single market and the concept of freedom of establishment, by simplifying and harmonising cross-border mobility
EEA insurers can now move their place of incorporation without the need for an insurance business transfer.
From the end of January, limited liability companies in the European Economic Area (EEA) are able to move their registered office from one EEA member state to another while retaining their legal personality.
As a result, all the assets and liabilities will be retained by the redomiciled company. For insurers based in EEA jurisdictions, this means they will be able to move their authorised head office within the EEA without the need to undergo the often expensive and cumbersome insurance business transfer process.
This new Cross-Border Conversion (CBC) mechanism is being introduced by Directive (EU) 2019/2121. It aims both to improve the functioning of the single market and the concept of freedom of establishment, by simplifying and harmonising cross-border mobility. It is expected to be a useful tool for insurance groups looking to reorganise their operations within the EEA.
Before the CBC, the only options for the transformation of corporate entities across the EEA were a cross-border merger (which does not provide for the continuation of legal personality and still requires a separate insurance business transfer) or the Societas Europaea (SE) or European Company regime. The SE regime requires groups to have subsidiaries/branches in different EEA jurisdictions for a period of time and in some jurisdictions, an insurance business transfer is still required.
The CBC process will be relatively straightforward and similar to the procedure for cross-border mergers. Key procedural steps include: the preparation of a number of documents (including a draft conversion proposal); corporate registry filings; the holding of a general meeting; the issuance of a pre-conversion certificate; and the scrutiny of the pre-conversion certificate by the relevant authority (for example, a court or a registrar) in the destination member state. It is anticipated the process will take between six and 12 months.
From a regulatory perspective, a moving insurer will be required to apply for authorisation in the destination EEA member state. The regulatory authorisation process should be undertaken in parallel with the redomiciliation process under the CBC. Typically, regulatory authorisation will take between six and 12 months (depending on the jurisdiction and the quality of the application submitted).
While no EEA regulator likes “jurisdiction shopping”, it is expected where there is a strong business case for a move from one EEA member state to another the regulators will be open to the redomiciliation
Redomiciling EEA-based insurers with a Solvency II-compliant operating model should be in a better position to undertake an authorisation application than a new entrant to the EEA market (and this may lead to authorisation times being on the lower end of the scale).
However, member state regulators will need to be satisfied the insurer can meet and maintain its thres-hold authorisation requirements. These regulators are likely to be particularly focused on anticipated levels of substance in the insurer’s new head office, ensuring the “heart and mind” of the insurer is located in the destination member state.
Regulators are also likely to want to review the pre-conversion certificate and confirm the safeguards for members, creditors and employees have been complied with and there will be no detriment to policyholders as a result of the move. The CBC provides safeguards against the use of the mechanism for abusive or fraudulent purposes leading to or aimed at evading EU or national law. Where the relevant authority believes a contemplated cross-border transaction could be used for abusive, fraudulent or criminal purposes, an additional three-month-period may be used to further verify the nature of the redomiciliation. This should provide additional comfort to regulators as to the bona fide nature of the move.
From a UK perspective, there is currently no mechanism that permits a redomiciliation or cross-border merger. In October 2021 the UK government consulted on a redomiciliation regime (following which a feedback statement was issued in April 2022). However, no further details have since been released. It is understood detailed analysis is needed and a further round of public consultation is expected. It is possible the introduction of the CBC at EU level may ignite renewed focus by the UK government on the redomiciliation regime.
The redomiciliation regime on which the UK government consulted on would allow a foreign-incorporated company to change its place of incorporation to the UK, while maintaining its legal identity as a corporate body. While the detail of any UK redomiciliation is to be confirmed, in principle it is expected a separate insurance business transfer process would not be required. However, similar to the position in the EEA, authorisation by the relevant regulators – the Prudential Regulation Authority and the Financial Conduct Authority – would still be required for insurers re¬locating to the UK.
It is anticipated the UK regime would provide an opportunity for insurers in both EEA and non-EEA jurisdictions to relocate to the UK. However, post-Brexit, UK authorised insurers do not have passporting rights into EEA jurisdictions and there may accordingly be limited appetite from EEA based insurers to move to the UK. Nonetheless, for non-EEA insurance groups looking to focus on the UK market, a redomiciliation regime is likely to be welcomed. Currently, however, there is no timeframe for the introduction of a UK redomiciliation regime or any certainty it will in fact proceed.
Martin Membery is a partner and Andrea Hynes is a senior managing associate at Sidley.
This article first appeared in Insurance Day. View the article here.