David Worsfold
“Prepare for the worst …. But hope for something better” was the mantra at an insurance industry conference on Brexit in London last week.
The audience may have been global complex claims experts as it was an International Federation of Adjusting Associations conference, but the message was universal as far as the wider insurance and financial services sector was concerned. There is no time to be lost in preparing for Brexit and acting on those preparations.
“Brexit Day” will soon be enshrined in UK legislation as 29 March 2019. This is the only certainty we currently have. Everything else is speculation. Insurers and asset managers cannot put off making the decisions that protect their interests and the interests of their clients should that date be the only one that matters. It could be the date on which the UK leaves the EU with no trade deals, no transitional arrangements in place, no passporting, no cross-border recognition and no time to put in place the corporate and legal structures necessary to service European business. That may be a Doomsday scenario to many in the insurance and financial services but it is a scenario that has to be taken seriously. The sector’s future – along with every other industrial, agricultural and service sector – is in the hands of the politicians. The posturing of both sides over the last couple of weeks has made the possibility of an abrupt, brutally hard Brexit more likely.
Talk of compromise and last-minute deals to pull back from that brink still waft around but surely no-one can make serious business decisions on the basis of vague, ill-defined hopes. So, what are the deadlines and the hard realities of each of those? If the UK is heading for a hard Brexit, then it is not next year that matters but 29 March this year. Annual contracts relying on cross-border trading and passporting arrangements signed after this date will have the dark cloud of uncertainty hanging over them. If firms believe they might need authorised entities in the EU in order to maintain seamless relationships with clients and service providers, then they need to stop talking and start acting because authorisations in most alternative domiciles are taking at least twelve months to process.
So far, 27 insurance groups have announced plans to establish subsidiaries elsewhere the EU as a result of Brexit with Dublin and Luxembourg being the top choices. Many firms are relying on there being a degree of mutual recognition so long as the UK regulators maintain equivalence with European regulations. At the moment, this is a one-way street with only the UK financial regulators saying they will maintain a limited mutual recognition for modest sized European firms wanting to do business in the UK. None of the 27 national regulators across Europe have given any indication that they will offer the same degree of reciprocity and the European Insurance and Occupational Pensions Authority (EIOPA) has given them no encouragement to do so. There is much talk of a transitional period after March 2019 and this would be widely welcomed but that too is surrounded by uncertainties.
First, the prospects of there being an orderly transitional phase appear to have receded after last week’s toughly worded speech by the EU’s chief negotiator, Michel Barnier.
Second, there is no clarity about how long a transitional phase would last. UK ministers talk vaguely about two years but the only offer so far tabled by the EU specifies an end to a transitional phase on 31 December 2020.
Third, there is a strong possibility that the UK might opt out of some financial services regulation straight after the end of any transitional period, according to recent reports of Prime Minister Theresa May’s plans. If that happens, all bets are off in terms of the future of any cross-border trade deal.
Insurers setting up shop in the EU need to make sure they are aiming for the right level of authorisation. According to one legal expert, many firms are unclear on whether they should just set up a branch or a fully-fledged, capitalised and locally managed subsidiary. If they want to use a new EU base to trade across multiple countries in Europe, then the subsidiary route is the only one that will guarantee them access to all markets. Amid all the noise and political posturing around future trade deals with the EU, one key factor is being overlooked and this should be injecting more urgency in getting a deal in place before 29 March 2019. If a new trade deal – “free” or otherwise – is agreed as part of the formal Brexit process, it will only need a qualified majority of the EU’s other 27 members to be approved.
This would apply to an all-embracing deal or sector-by-sector arrangements, although Barnier has specifically ruled out any stand-alone deal for financial services. However, if the UK leaves the EU without a trade deal in place and negotiates a fresh deal after Brexit, that under EU law will require the unanimous support of all members. This is why deals, such as the oft-quoted one with Canada, take years to agree. One little silver lining to the Brexit cloud might be found in our relationship with the European Economic Area. To leave this only requires one year’s notice – and, so far, the UK hasn’t served that notice. Something else that needs to be done by 29 March this year. Perhaps we should keep quiet on that one.