As Prime Minister Theresa May is set to announce more detail on the Government’s Brexit negotiating stance in the final ‘Road to Brexit’ ministerial speech, the Chartered Insurance Institute (CII) urges the Government to publish the long-awaited Brexit position paper on financial services as the insurance and financial planning profession divides over its desired future regulatory relationship with the EU.
The insurance and financial planning sector is almost perfectly split on the type of regulatory framework the industry would like to see the UK pursue after Brexit. That is according to the Chartered Insurance Institute’s (CII) annual economic outlook and Brexit survey of its members. The divergence between those favouring a more “light touch” regulatory regime and one which remains closely aligned with the European Union post-Brexit, underlines the need for the Government to set out its assessment of the economic impact of the various options on the table, according to Lawrence Finkle, public affairs executive at CII.
This is one of the CII’s key asks of government as the UK enters the next phase of Brexit negotiations with Brussels.
“What’s most instructive to us is the complete split down the middle of the membership regarding the type of relationship that our members believe would be in the best interests of the profession to seek post-Brexit,” continues Finkle. He believes the profession is clamouring to see evidence-based analysis to help firms make informed strategic decisions.
“It’s exactly that type of analysis which the sector is crying out for” he says.
In the days after our interview, a Government impact analysis of different Brexit scenarios has been obtained by Buzzfeed News. The study, which ministers insist is not complete, shows that every sector will suffer because of the UK’s decision to leave the European Union. Speaking prior to the leak, Finkle says that more senior CII members marginally favour the vision of Global Britain with a “light-touch” regulatory framework, but the near perfect divergence of opinion showed the uncertainty that still exists within the sector. The CII has called for the Government to clarify the nature of the relationship it seeks with the EU, particularly in relation to financial services, after having reneged on a previous pledge to publish a position paper as it did for 14 other areas of the economy. “In the absence of a clear position from Government on financial services, it has been left up to market initiatives such as that led by the International Regulatory Strategy Group to provide a vision of what the desired future relationship should look like.”
And senior MPs agree. Commenting on the Government’s failure to publish a position paper on financial services, Treasury Committee Chair Nicky Morgan said:
“The failure to publish a position paper on financial services sends all the wrong signals.
“Financial services will be one of the most challenging elements of the Brexit negotiations. A paper articulating a clear sense of direction, and a desired end-state, could have boosted confidence that the Government is up to the task.
“Some level of clarity has been provided for numerous sectors. Financial services firms will be seriously concerned at the chronic state of uncertainty.”
Also responding to the survey, Chair of the Select Committee on Exiting the European Union Hilary Benn said: “There is now an urgent need for clarity from the Government as to what kind of future economic relationship with the EU it will seek. This must include the Government’s plans for financial services which need to be published without delay.”
The survey does find however a notable recovery in economic confidence from 2017, with 33% expecting the economy to improve compared with only 23% of respondents last year. A whopping 48% expected the UK economy to deteriorate 12 months ago, while just under 30% feel this way now. Finkle puts this recovery in confidence down to there being more information in the public domain on the direction of travel on Brexit, following the Prime Minister’s speeches at Mansion House and Florence, and a more “conciliatory tone” after the general election.
“At the time of the last CII member survey, there was a lot less information in the public domain about exactly what Brexit meant for the business community. Pre-general election, there was definitely the impression that decisions were being made without engaging properly with the outside world. Post general election, Mansion House and Florence, at least some public discourse around what [Brexit] might mean I think has been reflected in the results.”
Perhaps the finding of most concern for Whitehall from the survey is that just under a quarter of CII members at senior executive or director level consider it highly likely or likely that their firm will move operations out of the UK in a no deal Brexit scenario. Lloyd’s of London was one of the first major financial institutions to announce plans to relocate its headquarters to Brussels in the wake of the referendum result. Some 55% of respondents also said their firm has a contingency plan in place in the event of further market disruption.
Finkle notes that there is inter-sectional divergence on this matter, with firms based in London considering that they stand to “suffer the most out of the whole process”. He adds: “It gives a good indication of the expectation of some disruption that there is within the sector at the moment, despite warmer words from the Prime Minister, from the Cabinet towards financial services over the past 12 months – which there have been, compared to what there was in the lead up to Mansion House. It’s worth noting that neither transitional arrangements have been agreed or a no-deal scenario convincingly ruled out yet. That’s the context.”
And with more than 50% of CII members saying they are not confident that the interests of the UK insurance and financial planning sector are being well represented in negotiations to leave the EU, a five percent rise on 2017, the government is short of time to convince them otherwise.
“Despite the best efforts of the sector in communicating its wants and asks of government, there is still a sense that far too much of the public discourse has focussed on trade arrangements for goods, and not enough on services, and in particular that insurance and financial planning could end up losing out in the big traditional trade-offs that inevitably have to be made in the negotiations.”
Finkle suggests that firms operating cross-border will have made final decisions on potential relocations at the end of the first quarter of this year, as 12 months is understood to be the minimum amount of time for regulatory approvals to set up in Europe, while uncertainty still remains regarding the servicing of insurance contracts post-Brexit. Just one EU council summit will take place before this deadline as the negotiations enter the second phase, with the PM making another Brexit address today. “CII members need as much confidence and certainty as possible that existing market arrangements are going to be replicated enough for them to continue to conduct business as they currently do during any transitional that is agreed beyond March 2019,” Finkle adds. “But for many this agreement will come too late.”
Another remarkable finding from the CII survey is that every market within the sector considers Brexit to be by far the biggest risk to the future of the insurance and financial planning profession. This has been a consistent finding since the referendum in June 2016, and perhaps helps explain why more than twice as many CII members consider a second referendum to be beneficial to their firm as those who think it would be damaging. Just 14% of respondents agree that Brexit is making the UK a better place to do business, with 41% disagreeing.
The absence of a plan and timetable contributing to general uncertainty, and loss of passporting rights in the European Union are the biggest concerns for the profession. But there does seem to be a contradiction between firms’ concerns over uncertainty and a preference for a re-run of the EU referendum.
“I agree there is something of a tension there. That probably does demonstrate that it’s more closely linked to whether the membership considers Brexit to make the UK a better place for their firm or not,” explains Finkle.
Though there is more flesh on the Brexit bones since last year’s CII survey, Theresa May and her government are short of time to reassure members of the insurance and financial planning sector regarding the UK’s vision for the future. With firms preparing to make decisions on potential relocations at the end of quarter one this year, a lot is at stake.