The Brexit white paper and its implications for the insurance market

What is a white paper anyway?
It’s a formal statement of the British Government’s position on a matter of policy. It’s not a consultation paper – that’s a green paper. Generally, governments are reluctant to row back from the positions taken in white papers, which is why this one which is particularly controversial and has been followed by resignations.

What does this one say about the insurance market post-Brexit?
It says four main things:
  • the UK wants to be able to diverge from the EU in terms of financial services regulation;
  • passporting will no longer be possible and there will be no right of market access in either direction;
  • the UK will instead seek an enhanced equivalence regime that addresses some of the problems of the existing EU equivalence regimes and gives limited market access into the EU;
  • the starting position, at 1 January 2021, will be simply one of equivalence.
Let’s look at each of these in turn.

What does it say about regulatory alignment?
The government is not in favour of it. The main reason given is that because of the importance of financial services to financial stability, the UK may need to be able to impose higher than global standards. Intriguingly, it also opens the possibility of relaxation in the other direction: “the UK market contains products and business models that are different to those found elsewhere in the EU, and regulation would need to reflect those differences” which is not true of the current regulatory regime, where the UK must always follow EU directives.

What does it say about passporting?
It isn’t going to be possible. The paper does not lay out an explicit logical connection between the first point and the second, but the implication is that the British Government has concluded that the EU will not allow passporting post-Brexit, except under circumstances where the UK accepts full regulatory alignment, which the Government doesn’t want. This is also logically consistent with the position being taken in the paper on goods, where the government is prepared to accept a “common rulebook” and is asking for full market access in return.

So what does the insurance market get instead?
If it can be negotiated, an enhanced equivalence regime.The paper notes that the existing EU equivalence regimes are flawed. The main reason comes last:  “the existing regimes do not provide for phased adjustments and careful management of the impact of changes”. This is something of an understatement given the EU can withdraw equivalence at 30 days’ notice. So, the proposal is that an enhanced equivalence regime is negotiated.

It is fair to say that at this point the language in the paper becomes somewhat abstruse, and it is difficult to follow precisely what is being said or asked for. This may reflect intellectual uncertainty on the part of the writers or, more likely, a degree of disagreement about what is desirable or negotiable. It may well also reflect a desire to keep options open during negotiation. In essence it is a wish list of possibly negotiated outcomes.

One intriguing possibility is that for “the most important international financial services [sub-sectors]… those that generate the greatest economies of scale and scope” the new arrangement might provide for a cross-border provision. The paper is silent on which sub-sectors might be prioritised in this way.

Are there implications for the transition or implementation period?
Not directly, except in one important respect. The white paper makes no suggested changes to the transition, or implementation period, which is planned to run from 29 March 2019 to 31 December 2020. The position during that period is as follows. The EU Council issued guidelines on 29 January 2018 which set out their position in some detail. In particular, the whole of EU law and any changes to it will apply to the UK; the UK stays in the single market and the customs union; and the full competence of EU institutions is preserved. The UK position had been summarised in a speech by David Davies two days earlier and was remarkably similar: “Both sides must continue to follow the same, stable set of laws and rules, without compromising the integrity of the single market, and the customs union to which we will maintain access on current terms; maintaining the same regulations across all sectors of the economy — from agriculture to aviation, transport to financial services….in keeping with the existing structure of EU rules that will allow a strictly time-limited role for the European Court of Justice during that period. During this… period, people will of course be able to travel between the UK and EU to live and work.” Both these positions were incorporated in the text of the Withdrawal Agreement which was issued at the end of March 2018, with the parts referring to the transition period highlighted in green to indicate that they were agreed. So essentially, at a practical level, it seems likely that very little changes.

This all assumes that the Withdrawal Agreement is actually ratified?
Yes, this is the respect in which the white paper may impact the transition or implementation period. The paper repeats the EU’s mantra that “nothing is agreed until everything is agreed”, and specifies that “the Withdrawal Agreement should include an explicit commitment by both parties to finalise these legal agreements as soon as possible in accordance with the parameters set out.”

In other words, the UK Government is expecting that the matters covered in the paper are broadly concluded before the Withdrawal Agreement is signed, even though the actual future agreements cannot be concluded until after the UK has ceased to be a member. This obviously increases the risk that nothing will be agreed, especially since it is difficult to characterise the UK Government’s approach as anything other than “cherry-picking”, something the EU has been long opposed to.

How has the paper gone down with the industry?
So far, badly. CityUK said: “Mutual recognition [of each other’s regulatory regimes] would have been the best [approach] and it is regrettable and frustrating that it has been dropped before getting to the negotiating table.” The outgoing CEO of Lloyd’s has said that the proposals are “very disappointing” and “do not provide the certainty we are looking for”. She reaffirmed plans for Lloyd’s in Brussels.

Do they have a point?
It is quite right that the paper does not provide certainty:  the paper is only clear about what the UK Government does not want. On the question of what is to replace it, it provides a list of desiderata but not a clear picture. However, these reactions are not directly addressing a major problem: the political question of whether market access without regulatory alignment was ever really a runner.

So what are the problems with the industry’s alternative picture?
The basic problem is cakeism: the hope that we can get the best of both worlds overcoming the practical fact that we have to choose. Was it ever likely that the EU would concede full market access on the basis of mutual recognition of regulatory regimes which can by definition diverge?  The UK Government has clearly concluded that it won’t. And what the industry has then failed to answer is the question of whether, forced to choose, they would prefer regulatory flexibility or market access. The London Market Group’s proposals issued in November 2017, for example, did not address this question.  

So what does this mean for you?
As the outgoing CEO of Lloyd’s correctly observes, the white paper is the signal that businesses must now plan and execute those plans on the basis that there is going to be no agreement that preserves market access as we know it. In the worst case, this will happen from March 2019, because the unintended result of the UK government’s position is that no agreement is reached at all. But the far more likely outcome is that some agreement is reached so the implementation or transitional period will operate until 31 December 2020. However, not only is it unclear what can be negotiated but it is also clear that whatever is negotiated will not match up to the level of market access enjoyed under the current passporting regime.

This vindicates those businesses who have already started implementing their plans for an onshore entity and our advice to all clients that they should have a clear and comprehensive contingency plan. Those contingency plans should now be put into effect.

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