Stephen Hammond is a member of the Treasury Select Committee and MP for Wimbledon, and is a former Transport Minister.
The City of London and its ecosystem of financial, insurance, actuarial, legal and accountancy services is not only a British, but a truly European asset. It supports the vital flow of trade and commerce from the EU across many different countries, and acts as a bridge to markets in North America and the rapidly growing countries of Asia and Africa. It is in all our interests that this asset with its special trading partnership can endure and grow post-Brexit.
Over the past decade, there has been an increasing interdependence and cross-border reliance on the depth of capital and expertise available in London’s financial services sector, supported by consistent and transparent regulation. There is no better example of this than the London Insurance Market, which pools risks across the UK and EU markets. This business could be at risk post-Brexit, and many of Europe’s major international businesses could be left with protection gaps, concerns over the payment of their claims and continuity of insurance cover going forwards.
At the heart of this is finding a practical solution that would ensure that neither the EU or UK will have to sacrifice market access or control over their respective regulatory regimes. There are clear mutual benefits of finding a solution that overcomes this dilemma and there are existing precedents that we can look to, which could help us resolve this problem.
This dilemma of market access versus regulatory control has been tackled head on by the London Market Group, which represents the UK’s commercial insurers, reinsurers and brokers. They propose a Free Trade Agreement (FTA) – a bespoke agreement that would permit mutual market access, recognition of each territory’s prudential regimes, with a Solvency II equivalence outcome built into the agreement. (Solvency II is a Directive in European Union law that codifies and harmonises the EU insurance regulation.) In addition, they recommend supervisory cooperation, and a transition period to remove impediments to paying claims and ensuring client contract certainty.
This kind of agreement, known as a ‘prudential carve out’, is an approach well known to the EU. It has many benefits, including preventing regulatory duplication as well as the inevitable increased costs for EU businesses seeking to access London’s services.
Indeed, much of this framework already exists within other EU agreements, most recently in its agreement with the US for reinsurance services. This agreement removes the ability for the EU or US states to impose discriminatory collateral and local presence requirements on US and EU reinsurers seeking to operate in each other’s markets. It also allows US and EU insurance groups operating in each other’s markets to rely on oversight by their home state supervisors when it comes to worldwide prudential group oversight.
This arrangement would be a sensible, reliable and achievable starting point, and it is based on currently aligned regulatory regimes. Global regulatory cooperation is becoming an increasingly important feature of many financial services sectors and the UK, given its leading global role, often plays a highly influential part in developing and shaping global standards.
Solvency II, for example, was heavily influenced by the UK and, increasingly, countries have explored how they can align their regulatory systems to it. Bermuda, Switzerland and Japan in varying degrees have equivalence, but many other markets such as Singapore, Canada and the US have explored aligning their systems to these standards.
The passporting regime has engendered significant supervisory cooperation, not just between the UK and EU member states, but also between the US and Swiss regulators, who regularly all meet to exchange supervisory information on insurers and reinsurers that operate across these markets.
There are clearly other elements that would need to be agreed to achieve this. For example, not all the pan-EU regulators allow for third countries to be members, and this would need to be considered as part of the negotiations. However, given the active role that the UK regulators have played in many of these organisations, it would be hoped that our partners in the EU would see the value of retaining their experience and expertise. There will need to be agreement on resolution mechanisms and deviation principles. Again, with the realisation of the benefits of this type of agreement it should be possible to achieve.
All parties need to recognise the real prize of these negotiations which is to maintain access to this critical European asset, the City of London, and allow it to continue to facilitate business growth, creating the jobs, securing investment, paying their taxes and ultimately contributing to the economic growth we all want to see.