Brexit: the implications for the insurance industry
The UK has voted to leave the European Union. This briefing summarises the likely implications for the insurance market in the UK.
Published 14 July 2016
The UK has voted to leave the European Union. This briefing provides a summary of the current legal, political and commercial position for businesses and their professional advisors.
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.
It currently looks unlikely that the UK will serve notice under article 50 before October 2016 at the earliest, and possibly some time after that.
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.
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, however, this option would leave free movement of goods and services rights intact, allowing EEA businesses continued access to the UK and vice versa.
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 free movement of goods and services for UK 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.
The right of EEA businesses to continue to access the UK market post-Brexit would be a matter for the UK to determine; it would therefore be possible for the UK to continue to allow EEA businesses to carry on business in the UK, even if only for a transitional period, after Brexit, whether or not that right was reciprocated by EEA member states.
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.
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, if those operating in the UK financial market are expecting a bonfire of financial services regulation as a result of Brexit they are likely to be disappointed. And any settlement with the EU that permitted the continuation of trade on favourable terms for the UK 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 Brexit. It is less clear whether the rights from the UK into the EU (such as those presently held by a UK citizen living and working in another EU member state) would similarly be capable of being regarded as being vested. The working assumption as of now therefore has to be that the free movement of goods and services in either direction will cease on Brexit unless specific provisions are made to retain them.
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 and their professional advisors should try to identify the risks and opportunities associated with Brexit that they will face. These might include:
Having carried out this analysis, a number of steps may suggest themselves:
Clearly, professional advisors should also think how it can best provide reassurance to their clients, their clients' shareholders and employees that it has identified the issues and is on top of them, without hiding from the fact that there may well be significant challenges, and perhaps opportunities, ahead.
We have set up a Brexit Advisory Team to work closely with our clients to identify the issues and solutions to all aspects of the UK's future relationship with the EU, whatever form that may take. Please email firstname.lastname@example.org for more information.