The ongoing discussions between the EU and UK over a trade agreement for financial services has the potential to impact other jurisdictions which currently enjoy equivalence with Europe a leading lawyer has warned.
Martin Membery, co-leader of law firm Sidley’s Global Insurance Group warned the ongoing issues with Brexit have the potential to impact insurance and reinsurance centres such as Bermuda.
He warned questions about equivalence in three key areas present the greatest uncertainties for insurance groups based in the UK and those with UK subsidiaries. But they also present potential problems for other EU-equivalent countries (e.g., Bermuda, Switzerland, Japan), who fear that if the UK does not secure equivalence, the standards being applied by the EU to justify such a stance might in turn impact other countries’ equivalence assessments next time they are reviewed by the EU.
In terms of group capital requirements an agreement would benefit European underwriters said Mr Membery.
He explained granting group capital equivalence to a third country essentially means the countries involved would respect the other’s regime in terms of assessing the amount of capital an insurance group needs to hold for a subsidiary in the third country.
It’s an interesting area, according to Mr Membery, because granting the UK equivalence would actually be a benefit to EU-headquartered insurance groups.
“For EU groups with a UK subsidiary, group capital equivalence would mean the EU group would not have to hold additional capital over and above the capital requirements for their UK entity,” he explained.
On group supervision Mr Membery believed there is the potential for issues.
“An EU regulator looking at an insurance group based in a non-equivalent jurisdiction could impose additional capital charges if they feel the solvency regime for that third country isn’t as strong as Solvency II,” he added, referencing the EU directive that codifies insurance regulation; the UK currently abides by it. “While, for instance, they might not be legally able to impose those charges on a UK company, they could – if the UK isn’t granted equivalency – impose them on any EU subsidiaries within the group.”
In terms of reinsurance at present, and with the notable exception of Germany, most EU member states don’t impose local presence or compulsory collateral requirements on non-equivalent reinsurers. But without equivalence, the EU can change their rules at any time; they could declare, for instance, that going forward, non-equivalent reinsurers do have to set up a locally regulated branch or post additional collateral.
“It’s really important for the UK to secure reinsurance equivalence to create a stable footing moving forward,” explained Mr Membery. “While international groups with UK subsidiaries – including many U.S.-based reinsurers – could potentially switch their underwriting operations to equivalent locations (or to the U.S., which benefits from the EU Covered Agreement), UK-centric companies could lose significant EU business should they not be granted reinsurance equivalence.”
While a lot may be at stake here, it would seem, at least on the face of things, that so long as the UK and EU remain under the current Solvency II regime, equivalence would be the logical step. But that, too, may begin to change.
“It would be bizarre for the UK not to be granted equivalence seeing as they’re operating under the same regime already,” said Mr Membery. But the UK itself has an ongoing consultation about possible changes to its regime – for instance, around modifying risk margins – and the EU is looking at Solvency II as well.
“If the UK starts changing and/or if the EU makes changes that the UK doesn’t follow, that’s when regulatory divergence happens – and this divergence might strengthen the EU’s case for saying that the UK should not be granted equivalent status,” he added.
Mr Membery’s comments came as a new report found that while the majority of UK businesses have experienced some form of disruption in trade to the European Union since Brexit, that disruption is likely not to be short-lived.
Business campaign group London First and global professional services firm EY commissioned the research that found 75% have experienced some disruption and almost half expect that to continue in the long-term. That’s despite 71% having previously said they felt they were prepared for the end of the transition period.
The three most common areas where firms have seen disruption are to customs and supply chains (72%), tax and VAT (70%), and regulation (68%). Looking deeper, some of the challenges highlighted include delays getting goods to destinations (43%), having to re-register with regulatory bodies in the UK and EU (37%) and dealing with changes in contracts (38%) and data (34%). Nearly a third (29%) say they have stopped trading with the EU and countries not covered by rollover agreements because of the changes.
John Dickie, Acting Chief Executive of London First, said: “It’s clear that the disruptions to UK trade with the EU go beyond teething problems with the new regime. If the Government is to champion Global Britain successfully, it must redouble its efforts to fix our trading relationship with the EU. That includes tackling border delays, ensuring the free flow of data and providing adequate guidance for businesses navigating changes.”