David Worsfold
Insurers and asset managers struggling to see how Brexit will impact them found the way ahead becoming just a little clearer over the last week.
The overwhelming vote in the House of Commons to give Prime Minister Theresa May the authority to press the Article 50 button greatly diminished – if not almost eliminated – any prospect of Parliamentary rebellion to water down, delay or even stop Brexit.
We know that the withdrawal is likely to be at harder end of the Brexit possibilities as any prospect of the UK adopting the Norwegian option – frequently discussed during last year’s referendum campaign - were also finally extinguished.
Within days of the Parliamentary vote, the UK High Court dismissed a second legal challenge to Brexit which would have forced Parliament to specify if the UK’s leaving the European Union also meant leaving the European Economic Area that Norway belongs to and which gives it access to the Single Market.
While the referendum gave the UK government a mandate to leave the EU, British Influence, a pro-EU think-tank, argued it did not specify whether the UK should also leave the EU’s single market and launched a legal bid to force a separate vote on EEA membership.
But the High Court dismissed the case, without elaborating why it did so. The judges said they will explain their decision at a later date. Not surprisingly, at the end of last week, the UK government welcomed the court’s decision to dismiss the legal case.
A spokesperson for Prime Minister said the UK will embark on independently negotiated free trade agreements once it leaves the EU. “As the prime minister has said, we will not be a member of the single market and we will be seeking a broad new partnership with the EU, including a bold and ambitious free trade agreement.”
What this might look like became just a little clearer as the government’s Brexit white paper acknowledged the need to address these issues, especially for the financial services sector.
It confirmed there are over 5000 UK firms that use the passporting regime to provide services across the rest of the EU and around 8000 European firms that use passports to provide services into the UK.
"The financial services sector is an important part of our economy," the white paper says.
"It is not just a London-based sector; for example, two-thirds of financial and related professional services jobs are based outside the capital, including 156,700 in Scotland, 54,300 in Wales and 32,000 in Northern Ireland.
"In our new strategic partnership agreement, we will be aiming for the freest possible trade in financial services between the UK and EU Member States."
The Prime Minister’s major speech on Brexit at the end of January had already effectively dashed the lingering hopes in the insurance market of finding a way of remaining within the Single Market: “I want to be clear what I am proposing cannot mean membership of the Single Market”, she said.
The destination might be more certain but the route to it still remains shrouded in uncertainty as the Association of British Insurer’s director general Huw Evans pointed out: “The Prime Minister’s speech has provided greater clarity on her Brexit aims as we head toward the triggering of Article 50. We agree there are significant trade opportunities that a more global focus on competitiveness can bring. Her commitment to a phased implementation process is welcome but providers still need as much as possible resolved at the beginning of the negotiation process to minimise uncertainty for firms most affected by loss of automatic single market access.
“The ABI will also continue to press for a UK regulatory regime that becomes suitable for the British market, successor arrangements for passporting, swift agreement on labour market access and a harmonised data regime.”
Others also highlighted the lack of information in the white paper about just how the complex process of extracting the UK from the EU and the Single Market might be achieved.
Ivor Edwards, partner at Clyde & Co, said: "It is a positive signal that the Brexit whitepaper says that the government will be looking for the freest possible trade in financial services between the UK and EU Member States as part of a new strategic partnership agreement.
"However, at this point, no-one knows when that agreement might be reached, if at all, nor what provisions in might contain. The publication of the whitepaper has done nothing in terms of providing any clarity around the details.
"It remains in everyone's interests that financial services can be carried out efficiently across the continent by a system that provides for mutual market access.
"But the risk for the UK is that under the new strategic partnership agreement it might lose control of rule setting and mutual market access could be withdrawn or quibbled over.
"In the meantime, insurers won't wait-and-see. Planning for Britain's exit from the EU is well underway as insurance carriers believe they need to take concrete steps for all eventualities by setting up carrier companies in EU countries.
"It's not only UK based companies that are affected and who are making plans. There are over 500 general insurance companies headquartered in continental Europe who passport into the UK that need to take steps too."
Expect a series of important strategic decisions from major players in the coming months about how they will restructure their businesses to ensure they retain access to the Single Market, most likely without the hoped-for safety net of any recognisable passporting regime. It will be surprising if this doesn’t see several key investment and dealing functions moving out of London, taking jobs with them.