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By John Small
At the time of writing, July 31st 2018, there stands approximately 11 weeks between the deadline by which the United Kingdom (UK) and the European Union (EU) must reach some agreement as to what their post-brexit relationship will be. While the date of Britain’s departure from the EU is 29th March 2019 (with a proposed transition period lasting until 31st December 2020), a deal must be agreed by this October because it will require ratification in the individual parliaments of the 27 other EU member states, a process which will at its very least take 6 months.
It had been hoped that the EU would, because of the value of London’s status as a financial centre and because of the substantial outgoing trade the EU has with the UK, facilitate Britain’s exit by allowing it to maintain some of the benefits of EU membership without having to bare some of the associated responsibilities. Indeed, the mainstream pro-Brexit factions made this their rallying call. This however, has not happened. Instead, the EU has stood resolute in its position that its primary concern is the integrity of its internal single market and that the UK cannot “cherry pick” those aspects of market access which benefit it and discard those that do not.
Withdrawing itself from a cornerstone of the global economic system of which it was a prime architect was never going to be an easy proposition but there had been an overarching feeling in the City of London that the dreaded no deal scenario (where the UK has to revert to World Trade Organisation (WTO) rules, impose tariffs on its closest markets and lose its status as a preferred supplier of financial services as its regulatory system diverges from that of those markets) would never happen and that even though key aspects of the Brexit pitch were unrealistically optimistic, the worst that would happen would be a bad deal on everything else with a carve out for financial services, an industry which represents one fifth of the British Economy. This too, has not happened and the UK is closer to a no deal than anyone ever imagined it would be at the time of the referendum in June 2016.
How did we get here?
To give readers some context, for the better part of 40 years, Britain’s Conservative party has been at war with itself over the UK’s relationship with the EU. Like most Western conservative parties it is a coalition of global free market capitalists at one end and nationalist social conservatives at the other. The tension between these two strands over Britain’s place in the EU and in the world led to the June 2016 referendum which was itself was an attempt by the conservative party leadership to silence the anti-EU faction of the party because, while vocal, they are a minority. Needless to say that attempt did not go as planned.
The current British Prime Minster, Theresa May, attempted to unite the fighting factions of her party, efforts which have culminated in a formal statement of Government Brexit policy on the future relationship between the United Kingdom and the European Union a White Paper) which was released 4 weeks ago The White Paper was supposed to unite the Government around compromise positions allowing the country to present a united negotiating front to the EU. Instead, there was a flurry of Government resignations when it was released and it is widely agreed that the proposed negotiating terms represent the worst of all worlds, making the UK a taker of EU rules while limiting its access to European markets.
No deal or a bad deal
There is an overarching sense that the British Government’s demands on certain aspects of the post Brexit relationship with the EU will be untenable from the EU’s perspective and that as a result negotiations will break down and Britain will leave the EU without a deal. Even if that were not to happen, Britain’s financial services industry is braced for a bad deal.
The reason for this is that passporting, the coveted system which allows British insurance businesses to establish or provide services in other EU member states free from new regulatory hurdles in the host state, is not on the list of UK Government wants. This has come about largely from the realisation that there was not much point suggesting to the EU that it be retained as it would require adherence to the regulatory standards of the EU which the British Government was not prepared to accept.
Subject to successful negotiations, the UK will instead seek an enhanced equivalence regime which it is hoped will allow mutual recognition of financial services products, instruments and processes. The concern though is that all existing equivalence regimes are staunchly in favour of the EU and – considering the current tone and trajectory of the negotiations – there is no evidence to suggest that the EU will be much more facilitating of British aspirations in this regard.
More broadly, there will be no regulatory alignment between the EU and UK. As indicated in a previous article in this publication, financial stability is of too great importance to a country to have its terms dictated by a third party, which is what the EU will be once the UK leaves it.
There is also in the Government proposals a reference to a possible “cross border provision” for some financial services subsectors, proposals on this are vague and it is thought that the difficulty which the Government had in agreeing what it wants has lead to a lack of clear stated objectives in this area.
Needless to say, the Government’s proposals, which are supposed to be Britain’s best case Brexit scenario, have gone over like a lead balloon in the insurance industry. Lloyd’s CEO Inga Beale called them “very disappointing” and reaffirmed Lloyd’s belief that mutual regulatory recognition would have been the best approach. She also reiterated that the insurance market’s newly established Brussels hub is ready to step in and allow Lloyd’s coverholders to continue access to continental markets regardless of the outcome of Brexit.
Shortly after the release of the White Paper, Britain’s financial services regulator the Financial Conduct Authority (FCA) announced publicly that it was now making plans for a no deal scenario, including implementing regulatory programmes for the 8500 European financial services businesses which are providing services in the UK to be granted temporary permission under a new regime to allow them to continue conducting business. It is of course hoped, though it is not at all clear, that the EU will reciprocate in this regard.
There are increasingly respected voices calling for a second referendum on the terms of any final proposed deal – when a former cabinet member recently joined those calls, the overwhelming retort was ‘what question would we ask’ as opposed to the in principle arguments that were being used 6-12 months ago.
Former Lloyd’s chairman John Nelson was the most recent to add his voice to this chorus labeling the Government’s White Paper the “worst possible scenario” for the insurance industry. By any measure, there is no majority in the British Parliament to sanction a no-deal and the government’s proposed deal is disliked not only by the financial services industry but also by Brexiteers and Remainers alike. If Parliament were to reject both options then the default position would be to remain in the EU however by so doing Parliament would be acting contrary to the expressed opinion of the 2016 referendum. It is therefore thought that to rid itself of the responsibility, parliament may put the final decision back to the electorate at another referendum on the terms of the deal. There are however a myriad of logistical and technical obstacles to this and it is not at all clear that it will happen.
The here and now
So what does all this mean for financial services and for the risk management industry in particular. As a law firm and a consultancy working actively in the regulatory space, it has come as something of a surprise to us at EC3 Legal and EC3 Consultants that we are receiving a spike in instructions, even from some fairly big insurance intermediary players, regarding both re-domicile in the EU and seeking advice on contract continuity*. This has come about largely because the wait and see approach that some of the more nimble intermediaries had been taking, in part because the idea of a no-deal scenario or the loss of passporting was so unthinkable that the risk of it coming to fruition made planning for it a waste of resources, has now come to an end.
With most major regulatory and industry bodies now advising that they are planning for a no deal scenario, these are the preparations that are finally being made as even the smallest businesses scramble to secure continued EU market access and the continued ability to write business in the EU. It should be noted that even if there is a deal, the Government White Paper sets out that they will not be seeking regulatory alignment or mutual recognition and so the insurance industry is now in full preparation for a genuine and fundamental change in it’s relationship with continental European markets and for a relationship which is both more restricted and more distant than is has been.
*insurance contract termination clauses can often be triggered by changes in the regulatory status of the parties
London Insurance Market braces itself for Brexit chaos
By David Worsfold
A painful dose of Brexit realism is surging around the London insurance market and the City of London’s financial services sector as confidence in the UK government’s ability to deliver an orderly Brexit collapses.
Prime Minister Theresa May’s attempts to break the deadlock within her own Conservative party and with the European Union in mid-July saw her abandon the all-important services sector completely. Across all service sectors this accounts for almost 80 percent of UK GDP with financial services accounting for 6.5 percent, down from its pre-financial crisis peak of 9 percent. Her plan for a customs deal to keep trade between the UK and the EU going after Brexit focused on manufacturing and agriculture only. Even that has already been sabotaged by pro-Brexit supporters in her own party and firmly rejected by the EU’s inflexible chief negotiator Michel Barnier.
The City has given up hope of any hope of any deal involving mutual recognition of regulatory regimes or a deal over equivalence that would effectively maintain the status quo for cross-border trade. This is despite the UK regulator, the Prudential Regulation Authority, saying it is prepared to recognise EU regulations so that EU firms can continue to trade and open branches in London.
Many senior figures have slammed the government’s failure to deliver a deal that would enable them to provide services across EU borders after Brexit, with former Lloyd’s of London chairman John Nelson being among the most critical voices. In a letter to the Financial Times he said: “Never in 50 years of working life have I seen the UK facing such an abject future, caused by the complete failure of our political establishment to govern, to communicate clearly with the public and, most importantly, to be honest with the electorate.
We have many senior politicians who are seemingly consumed with their own ambition and vanity, with little regard for the best interests of the country.” He went on to appeal to businesses to do more to make people aware of the consequences of a no-deal Brexit on 29 March next year.
Malcolm Newman, chairman of the International Underwriting Association, was more restrained in his language when he spoke at the IUA’s recent annual general meeting but left his members in doubt about the extent his fears:
“We were disappointed that our desire for a comprehensive free trade agreement based on mutual market access for our customers seems now to be impossible. Businesses need to continue to access our market’s specialist risk capacity and we continue to work closely with the market to influence positive outcomes from the Brexit negotiations.
“It is also frustrating that the negotiations are not as well advanced as we need to serve our clients. We sincerely hope that the next few months will lead to successful conclusions to satisfy our market’s needs and preserve our unique trading advantages of talent, capital and innovation.”
The big fear running through the London Market is that without any deal, policies already written in London for EU clients that go beyond 29 March next year could be invalid. Lloyd’s and London market insurers have therefore agreed a new clause to help companies manage insurance contracts across the Brexit break. It allows a risk to be placed with both a UK domiciled insurer and a ‘contingent’ EU-based insurer. In the event of any Brexit difficulties, this contingent insurer will step in and fulfill any policy obligations that the original carrier is no longer able to cover.
Individual firms are also being much clearer on their own plans with major brokers in particular beefing up European operations either by expanding existing EU-based subsidiaries or acquiring new ones, a course favoured by JLT which has recently snapped up brokers in Belgium and Germany.
Chief executive Dominic Burke said “We are executing business plans in preparation for a no deal Brexit scenario and what we have been doing in the business so far has allowed us to execute operations in Europe. We simply have a responsibly to clients to provide them with services, and those services need to be compliant in a post-Brexit world. We would rather execute our plans now than wait a further nine months to see what the outcome of Brexit is.”
Theresa May or Theresa Cannot, this is but one question
By George Worsley
“A pity you can’t say “all sorted” about Brexit and the British government. Total and utter incompetence. Theresa May needs to change her name to Theresa Cannot. She is an embarrassment as are the main players in her team. The latest example of her inability to understand what Brexit is relates to Motor Insurance. Post Brexit, UK drivers will need a Green Card-type of extension to their policies showing there is coverage when they drive in the EU – just like it was before Britain joined the EEC. Britons are moaning. The EU says, “automatic EU-wide coverage only applies to members of the club. Mrs. May, how can you tell your citizens that you wish to negotiate EU-wide coverage in ‘club countries’, when you will no longer be a member of the club.” Mind you, personally, seeing as we drive in the EU five or six times a year, this would be great; but then again I did not vote for Brexit and have to suffer the consequences of so many un-and ill-informed Brexiteers.
The same looks to be the case with financial services hardly getting a mention in her plans. If this continues, then whatever deal Britain manages to agree with EU, financial services will have been kicked to the back seat: out of view, out of mind. It looks like all those new EU-based carriers are going to be busier than they anticipated and may even have to have properly trained staff on the ground in Brussels, Luxembourg, etc (oh, how bothersome!), as opposed to envelope-fillers for packages back into London.
There have been calls for a second referendum but the big problem is: people still do not know what the options really are. Britain is blundering along like a blind bumble bee.”