The UK has voted to leave the European Union. This briefing summarises the likely implications for the insurance market in the UK.
The timetable for Brexit
The key point to note is that nothing immediately changes as a result of the referendum result. Indeed, the result does not formally commit the UK to any particular timetable or even to leave the EU at all. This gives the UK some flexibility in its negotiations with the rest of the EU. It also means that how things play out will primarily be a matter of politics rather than law.
That flexibility is lost, however, once the UK gives formal notice, under article 50 of the Treaty on European Union, of its intention to leave the EU. When that notice is given, the two year process towards an exit, set out in article 50, begins. Under article 50, any extension to that two year period requires the unanimous agreement of all other member states. While those two years are intended to give time in which the terms of an exit agreement can be agreed, exit will happen at the end of the two years (assuming member states do not agree an extension) whether an exit agreement is reached or not.
The Leave campaign itself indicated that it had in mind Brexit in 2019; what seems clear is that protracted negotiations will be in no-one's interests.
From a legal perspective, the most significant aspects of an exit agreement are likely to be around the transitional arrangements and the extent to which rights acquired pre-Brexit are preserved.
Life outside the EU: the options
Exactly what life outside the EU will look like for the UK is unclear. The so-called Norwegian option, of continued access to the EU through membership of the EEA, was largely shunned by the Leave campaign. Certainly, it would not achieve any greater control over immigration from the EU than exists currently. Importantly for the insurance market, however, this option would leave passporting intact.
Any alternative model, be it based on the position currently enjoyed by Switzerland, Turkey or Canada, would be likely to take several years to agree. It would be unlikely, based on any existing precedent, to allow wholesale passporting for UK financial firms into the EU, although some bilateral agreements with individual member states might be achieved. The default position, in the absence of agreement, would be the framework of international agreements largely operating under the auspices of the World Trade Organisation.
It is important to note that the exit agreement referred to above would be negotiated separately from any agreement with the EU about our future relationship. Indeed, a number of European officials have been quoted as saying that the two agreements should not be linked. The period of uncertainty over the UK's long-term relationship with the EU, not to mention the rest of the world, could therefore extend significantly beyond the 2-3 years it may take to agree the terms of the UK's exit.
Implications for UK law
There is currently a huge body of UK law that derives from EU law. Dismantling this, and even identifying and agreeing on which aspects should be dismantled, will be an immense task. It will not simply be a case of repealing the European Communities Act 1972, because the many regulations made under the ECA, both in Westminster and in the devolved administrations, will need to be retained until free-standing UK legislation can be implemented.
As a priority, EU Regulations, which have direct effect in member states without the need for domestic legislation, will have to be replaced by UK law immediately on a Brexit. Examples include the General Data Protection Regulation, the Solvency II Delegated Regulation, and the Market Abuse Regulation. As a stop-gap, it may be necessary simply to provide that such Regulations continue to take effect as if they formed part of UK law.
In the longer term, where it is intended that that domestic legislation should move away from the position previously required under EU law, that will need to be the subject of consultation and political debate. The details of financial services regulation are therefore likely to be vying for attention along with a great many other issues, many of which will carry much greater political significance.
The likely direction of future regulation
A key question is: what will UK financial services legislation look like following Brexit? We think the answer is that it would look very similar to the way it does now. This is partly because a number of key European measures implement agreed international principles (such as Basel III and the IAIS Common Framework), which it seems reasonable to assume the UK would wish to continue to adhere to. In addition, the UK would no doubt wish to have equivalence status under Solvency II.
While some changes might occur at the margins, therefore, particularly given the willingness of the UK to gold-plate financial services directives in the past, there seems little reason to expect a bonfire of regulation immediately following a Brexit. And any settlement with the EU that permitted the continuation of trade on favourable terms would almost certainly bring with it a requirement to maintain at least broadly equivalent legal and regulatory regimes.
It is to be hoped that an exit agreement negotiated under article 50 would address the position of existing rights in detail, as in the absence of such agreement the law is unclear. One can see arguments that existing or vested rights (such as the right of an EU citizen living and working in the UK pre-Brexit) should be retained following a Brexit. It is less clear whether a passporting right from the UK into the EU would similarly be capable of being regarded as being vested.
The position of firms in other EEA member states passporting into the UK is also unclear. Schedule 3 to FSMA can be read in a way which would mean that EEA firms exercising passporting rights into the UK pre-Brexit could continue to do so after the UK ceases to be a member state of the EU. In any case, that would clearly be something the UK could choose to allow explicitly. However, the working assumption as of now has to be that passporting rights, in both directions, will cease on Brexit.
What should you do now?
With the uncertainty over the timing and the form of Brexit, precise legal steps are difficult to identify. However, we would recommend that, as a starting point, all businesses should try to identify the risks and opportunities associated with Brexit that they will face. These might include:
- Short-term economic effects pre-Brexit, in the form of exchange rates and investment returns
- The effect of economic uncertainty on clients' and counterparties' willingness to transact or make long-term commitments
- Medium and long-term economic effects of Brexit, such as a fall in UK GDP
- The loss of the four freedoms for UK businesses (goods, capital, services and people), in both directions, including the loss of passporting rights and the free movement of employees within the EEA
- Existing long-term contracts that would be adversely impacted by Brexit.
- Implications for policy wordings.
Having carried out this analysis, a number of steps may suggest themselves:
- Consider establishing an authorised group company in another EEA member state if you do not already have one in the group, to ensure that passporting rights can continue to be exercised following a Brexit
- Ensure all future long-term contracts include break clauses where possible, either expressly linked to Brexit or specific potential consequences of a Brexit, such as the loss of passporting rights, if relevant
- Identify and implement policy wordings in good time ahead of Brexit
- Work through trade bodies such as the ABI and BIBA to ensure issues and concerns around the exit agreement, any new trade agreements, and implications for insureds and the wider insurance market are relayed to government.
Finally, you should also think how you can best provide reassurance to clients, shareholders and employees that you have identified the issues and are on top of them, without hiding from the fact that there may well be significant challenges, and perhaps opportunities, ahead.