“You can check out anytime you like, but you can never leave”.
That line from the Eagle’s 1977 hit song Hotel California could become the post-Brexit epitaph for the UK insurance and financial services sector’s relationship with the European Union’s regulatory regime.
Some may have hoped they would never have to read an EU directive again once the ink was dry on the Christmas Eve deal sealing the UK’s departure from the EU. That would be naïve and very risky for any business with European clients or suppliers. Every move the EU makes on the regulatory front has potential implications for UK insurers, brokers, advisers and their suppliers.
It won’t be just financial regulations that insurers will have to watch but those covering customer data and the use of artificial intelligence too. The EU is hot on data protection: just look at GDPR.
Hopes that deals could be done on equivalence, the mutual recognition of each other’s regulations, are as good as dead.
In the wake of the Christmas Eve deal, which made no mention of financial services, both sides agreed to produce a Memorandum of Understanding on Regulation (MoU) by the end of March. This was meant to pave the way for a new mode of co-operation between EU and UK financial regulators, including exploring the scope for equivalence. The UK’s bold, unilateral gesture of recognising 17 areas of EU financial regulation as equivalent looks to have very little hope of being reciprocated, although some in the industry still talk about some slack being cut by the EU on cross-border reinsurance and group supervision.
This process is now caught in increasingly bitter political crossfire. By the end of March, all that was on the table was an outline agreement on the technical measures the MoU might contain. The UK Treasury has no idea when to expect progress and as the UK slides down the popularity rankings in Europe the prospects of anything substantial being agreed grow remoter by the day.
Rows over the access of French trawlers to Channel Island waters, the future of the Northern Ireland protocol and the procurement of vaccines have given the EU and its 27 member states reasons to stall, with the French apparently the most stubborn in refusing to even consider a deal on financial services until it can catch more fish. Even if some limited equivalence does eventually emerge, uncertainty will still haunt UK firms as the EU has the power to withdraw access at just 30 days’ notice. That’s no way to plan a business.
The Association of British Insurers has argued since the Brexit referendum five years ago that it did not want the UK to be a “rule taker” and believes the deal that has been struck achieves this. Only up to a point.
The longer the UK stays outside the EU the more rules will diverge. As they do so, many in the EU will look exploit the opportunity to weaken the UK’s powerful financial sector.
Talk by the Chancellor, Rishi Sunak, and Andrew Bailey, Governor of the Bank of England, of looking at Brexit as an opportunity to create a regulator regime more sympathetic to the needs to the UK firms has immediately rung alarm bells in Brussels. Mairead McGuinness, the Commissioner for financial services, said the EU would be watching closely, very closely, in a recent TV interview
“We have heard words like deregulation, we know that Brexit was about moving away from what Europe has done across all sectors and possibly including the financial sector. We do recall the past and light-touch regulation in financial services, and it did no one any favours”.
European regulators are not just talking tough but are already acting tough.
The many UK insurers and brokers that have re-domiciled business to Europe in order to maintain vital access to the single market for their European clients are finding that jumping through the initial regulatory hoops might not be enough. Prompted by the pan-European regulator EIOPA (European Insurance and Occupational Pensions Authority), national regulators are starting to ask tough questions about where the management control, underwriting, claims and investment expertise of these newly re-domiciled operations really sits.
One of the first to feel that heat is Lloyd’s of London which set up a large new office in Brussels amid confident fanfares. It is now facing a grilling by the Belgian central bank, asking why its underwriters are nowhere to be seen. With threats of withdrawal of regulatory approval hanging over its head, Lloyd’s faces some difficult decisions.
It is vivid proof that any firm – insurer, broker or supplier – that wants to do business in the EU or look after clients with European interests will not be leaving the EU regulatory orbit anytime soon.