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A Brexit of illusions

By David Worsfold

Brexit is everywhere. In the UK you cannot escape from it. Brexit dominates the news, the whole political system is consumed by it, it is top of boardroom agendas and it is the most frequent topic of conversation wherever you go. Even though some families and friends try to avoid discussing it – for fear of falling out – Brexit still looms large as the grim elephant stalking the room.

There is an increasing sense of desperation – or is it despair – as the country hurtles towards the EU exit door. Endless scenarios are mapped out which will either see the UK propelled firmly through that door on 29 March, find the departure delayed for months while something – no-one knows what – is renegotiated, or even see Brexit cancelled. This latter scenario is looking increasingly unlikely.

Some of the scenarios have entered the realms of fantasy, and our politicians are not immune on that count.

In one night at the end of January they managed to vote to send Prime Minister Theresa May back to the negotiating table with a mandate to renegotiate one part – the Irish border – of an agreement that MPs (Members of Parliament) rejected by an unprecedented 2 to 1 majority just two weeks earlier. That same night they narrowly voted to against a no-deal Brexit. Yet, the chances of persuading the EU to change an agreement it took months to negotiate are not promising, which means the UK Parliament either accepts the original deal or leaves on 29 March with no deal. They voted for an illusion, not a reality.

The day after that vote, British businesses, including the insurance and financial services sector, were unanimous in saying they were re-doubling their planning for a hard – no deal – Brexit on 29 March. They could see what the politicians were blind to: by voting against May’s original deal, against a no deal but for a renegotiation that the EU has already rejected, they had actually made a no deal Brexit more likely.

The insurance industry, along with the entire valuable service sector, has never been part of Prime Minister May’s deal. 80 percent of UK GDP is excluded from it.

What the abandoned service industries have been hoping for is a two to three year transition period following Brexit during which a new relationship with the EU can be worked out. For them all the talk about trading on World Trade Organisation terms is another irrelevant illusion. The WTO is just about tariffs while trading with the EU is about regulatory alignment.

If the UK insurance industry wants to maintain a smooth relationship with its European clients two priorities have to be addressed. Firms can re-domicile large parts of their business into new EU subsidiaries and many are already doing this with Dublin and Luxembourg as the top destinations. For those who need to maintain cross-border relationships they also need UK regulations to stay in line with European regulations. Their hope was that this could be worked out during the transition period: a hard Brexit with no deal jeopardises that.

The alarm bells started ringing even louder at the end of January when the powerful Treasury Select Committee of MPs announced that it was going to look at how UK financial regulations could be varied after Brexit.

Launching the inquiry, Nicky Morgan MP, chair of the Treasury Committee, said: “London is the world’s premier financial centre, and many of us want to keep it that way.

“Brexit will have a significant and long-lasting impact on the financial services sector, including the insurance, retail banking and asset management sectors, in the UK, the EU, and potentially the rest of the world.

“The UK may converge, seek equivalence, or diverge from the EU. As part of our new inquiry, the Treasury Committee will examine the risks and rewards of each of these choices.

“We’ll also explore the opportunities outside Brexit, such as fintech, on which we should be capitalising.

“After we’ve taken evidence from industry, regulators, ministers and officials, we’ll make a series of recommendations to the Government and regulators about what it should prioritise in negotiations with the EU and the rest of the world.

“We’ll also seek to conclude whether it would be in the long-term interests of the UK to align closely with EU financial rules, or to forgo financial services trade with the EU and pursue trade with other third countries.”

That last sentence is the sting in the tail. It is precisely what insurance company bosses fear, the illusion that by deviating from the narrow path of equivalence with the EU there is a new world of yet untapped trading relationships that will be opened up.

The crisis over Brexit is unprecedented and has been made worse by the woeful inadequacy of British constitutional precedent to cope with it. The UK is a representative, Parliamentary democracy but the referendum was an exercise in direct democracy. That put Parliament on a collision course with the people. Our unwritten constitution and the arcane precedent-based rules of Parliamentary procedure have both been exposed as not fit for purpose. That, above all, is why it is so hard to predict where we will be at 11pm GMT on Friday 29 March 2019.