When most people think about the City’s financial services sector, they picture Canary Wharf and big banks. However, within the square mile of EC3 there is another significant financial services sector that is often overlooked. It employs over 48,000 people in London and around the UK, turning over more than £60 billion. I am referring to the London insurance market and its numerous brokers, insurers and various support companies, including Lloyd’s of London, the oldest insurance market in the world.
The London insurance market, world renowned for its provision of highly specialised commercial insurance, is a truly global industry — trading with over 200 countries. Without it, planes would not take off, ships could not sail and infrastructure projects would never get built. One of the main reasons for the London insurance market’s success is its unique concentration of human capital — the unparalleled technical expertise and knowledge that resides in one small postcode — in addition to the financial capital it offers. Its scale and global reach is unsurpassed by any other insurance hub in the world, but there is a very real risk to its leadership position if we do not secure the very best deal.
Clarity and a smooth transition will be key
The firms I have spoken to recognise the negotiation complexities that the government faces once Article 50 is triggered next Spring. But they are keen to stress the danger of not providing clarity over the proposed negotiating stance regarding the retention of passporting rights for both UK companies operating in the EU and EU companies operating in the UK.
Losing these rights would impact on the £8 billion of business that comes into the London insurance market from the EU each year. Without these rights, London’s position as a leading insurance hub would inevitably be diminished. This is particularly pertinent, as the London insurance market faces significant, and growing, competition from other international insurance hubs such as Bermuda, Singapore, Dubai and Zurich, eager to grab a piece of London’s market share.
The longer it takes to achieve clarity on passporting, the greater the risk that London-based firms will move their operations to Europe. This would be a disaster for London and the UK economy, resulting in lost income, jobs and damage to London’s reputation as a leading financial centre.
With protracted Brexit negotiations and no clear picture likely to emerge for a while, the London insurance industry is keen for the government to secure transitional arrangements that ensure that UK and EEA headquartered firms can continue to use a single licence and remain subject to Home State prudential supervision. Having some transitional arrangements in place could be crucial in preserving financial stability, and ensuring continued, uninterrupted access to the financial services that London offers, until a final deal is negotiated.
Without such arrangements, once Article 50 is triggered, EU customers of UK-based insurers will face a choice when they renew their policies. With no certainty over the legality of contracts after Article 50 is triggered, the market expectation is that customers will switch their business to EU-based insurers instead. Clear transitional arrangements would help to reassure these customers, and give them the confidence to continue to place their business in London while more permanent trading agreements are made.
Are WTO rules a realistic option?
It has been mooted that WTO rules are a viable option, but the companies I have met believe that they are not an acceptable solution at all. They would only provide very limited access to the EU. In this situation, insurers would be forced to set up separate EU branches, or move their headquarters to an EU state, in order to access other EEA states. This scenario would undermine London’s unique and value-added position of offering centralised expertise and capital in one location, as well as add greater complexity to clients wanting to place cross-border, multinational insurance policies with UK-based insurers.
There is no silver bullet, but by the time the UK formally leaves the EU, any post-Brexit scenario should ensure that the UK’s regulatory regime remains comparable with those in EU member states, if business is to continue to flow freely between the UK and EU.
This is not just a challenge for the government. The regulatory bodies, the Financial Conduct Authority and Prudential Regulation Authority, also need to be mindful of the impact of their regulatory decisions on the competitiveness of our insurance market. There is a danger that over-regulation in a post-Brexit world will restrict innovation and hamstring us as we compete not just with foreign insurers, but capital markets players keen to disrupt and expand their footprint in the sector. Innovation has been the lifeblood of the London market and made it the towering force that it is today.
Against this complex backdrop, a careful balancing act is needed. One that considers the UK’s international competitiveness while supporting the appropriate regulatory environment that enables continued insurance passporting arrangements between the UK and the EEA, and continues to encourage new entrants to the UK from the EU and around the world.
The road ahead is not going to be easy, but as the government tasked with these delicate negotiations, we need to listen and be open to the needs of our financial services sector.