The Central Bank of Ireland regulates insurance in Ireland and the insurance supervisor Sharon Donnery spoke at the Irish Centre for European Law, Royal Irish Academy, Dublin.
- Disentangling the potential macroeconomic, financial stability, regulatory, and legal effects of Brexit is no easy task.
- There is no road map as to how a country goes about exiting the Union.
- Due to the restriction on any negotiations taking place before Article 50 is invoked, we know little for sure and even less in detail.
- To guide us in our risk assessment, policy development and strategy, we must look at all possible options that are left open to the many, and varying stakeholders.
A wide range of factors will determine the precise impact on Ireland’s economy. These include:
- The conditions of the UK’s exit and type of trade deal which will emerge from the negotiations
- The resulting impact on the UK, and the extent to which this is transmitted to Ireland and Irish firms including financial institutions
- The many possible regulatory outcomes.
- Given Ireland’s high level of exposure to the UK economy, we expect the overall effect to be negative and material.
- For the financial services sector, Brexit will also likely have implications for issues such as passporting, equivalence and hence implications for firms’ future plans for location or expansion.
The Central Bank is closely monitoring the exposures of domestic Irish banks to the UK, given their prominence in some cases, and potential channel for contagion.
A hard exit could result in the considerable migration of financial services firms. Since June there has been much talk of a new financial hub in Europe with many cities including Dublin put forward as possible candidates.
I do not believe that a new London will necessarily emerge in Europe but rather there may be a fragmentation of financial services across several European cities.
- Authorisation-related activity has continued to increase including queries on insurance authorisations.
- These have largely been exploratory.
- Many firms will wait until Article 50 is triggered before taking concrete decisions on activity and location.
- Our authorisation process has been clearly outlined on many occasions. Firms will be engaged in an efficient, open and rigorous process. We expect there to be a substantive presence here in Ireland.
- The establishment of new firms does indeed bring the prospect of potential upside in the form of new employment in the financial services sector.
For insurance we operate under a common framework for regulation and supervision. This should ensure other broader considerations – beyond supervision or regulation- drive location policy.
The potential establishment of new business lines in Ireland also presents a broad range of risks. For the Central Bank from a financial stability perspective, a key consideration is understanding the capacity of any potential firm to cause harm to the financial system, the economy and to citizens through its course of business - particularly were it to fail.
Higher degrees of complexity and interconnectedness of new firms underline the importance of taking an international perspective in our assessments of potential systemic risks. For new firms, it is particularly important we fully understand their interaction with broader firm structures, should a firm intend to establish a subsidiary here.
In a functioning market firms must be allowed to fail, subject to the deployment of recovery and resolution tools.
The insurance sector is not immune to externalities and systemic risks that must be closely monitored. Consideration of the risks of these firms in times of stress must also be assessed.
In recent weeks the UK released the white paper on Brexit. The central message was clear, namely that the priority for the UK is to regain sovereignty over immigration policy and have control over its own laws. However, many issues have yet to be addressed.
When the UK leaves the EU, they leave the jurisdiction of the European Court of Justice which presents many potential challenges. These challenges are complicated by the fact that issues differ from sector-to-sector and with regard to the specific legislative or regulatory requirements concerned. The relevant legislation will vary depending on firm type and activities involved.
What is important is that regulatory authorities ensure that any migration of firms does not lead to a more fragmented or disjointed supervisory system. Regardless of where an entity seeks to relocate, firms should expect a rigorous assessment of the applicable regulatory standards and intrusive supervision of their activities.
Regulatory authorities operate as part of the European System of Financial Supervision (ESFS) and, as such, should apply European legislative requirements in a uniform manner. This is a decentralised, multi-layered system of micro- and macro-prudential authorities, separated according to the banking, insurance and securities markets.
The objective of the ESFS is to ensure consistent and coherent financial supervision and the effective implementation of the rules in the financial sector. It also aims at preserving financial stability, promoting confidence in the financial system as a whole, and providing sufficient protection for consumers.
This commonality of approach is critical to ensure that there will be no ‘race to the bottom’ for firm’s location decisions; that the risk of regulatory arbitrage is mitigated; and that any of the financial stability risks that could arise as a result of a diminution of regulatory standards are avoided.
In some cases, new firms will be similar to those already operating in the relevant jurisdictions. In others, these will be new firm types, new business models or new pieces of market infrastructure.
Brexit has the potential to significantly change the financial services landscape in some jurisdictions as certain activities, which have historically taken place in London, relocate to ensure access to the Single Market.
For insurance, the European Insurance and Occupational Pensions Authority (EIOPA) aims to strengthen oversight of cross-border groups and promote coordination in the European Union supervisory response. It also ensures greater harmonisation and coherent application of rules, and better protection of consumers.
Brexit will have considerable implications for Europe, for Ireland and the Irish economy.
From a macroeconomic perspective, the conditions of the UK’s exit and the terms, timing and impact of the trade deal will be a key determinant for assessing the macroeconomic, financial and currency market effects. However, at present, considerable uncertainty remains as to the potential modalities of the deal, and hence to our macroeconomic assessment.
Turning to financial stability, new business lines and new firms brings new opportunities, new challenges and new risks for the economy. These factors need to be considered in the context of European or global financial markets. As with everything surrounding Brexit, we must be flexible and prepare for all eventualities.
Yes, there may be some employment benefits here in Ireland from firms that may choose to establish here. However, given the domestic economy’s exposure to the UK, we expect the overall effect to be negative and material.
The regulatory future is equally complex and uncertain. In the meantime, the Central Bank will continue to fulfil its responsibilities to deliver assertive risk-based supervision that is undertaken in the context of the wider European System of Financial Supervision. This is critical to ensure no race to the bottom, no regulatory arbitrage, and no unwarranted financial stability risks emerge.
For all aspects, it will take some time before we be able to navigate a route to clarity.