When the UK departs from the EU, unless action is taken, a wide range of financial contracts between UK and EU counterparts could cease to be serviceable, in particular in insurance. This could affect 30 million EU and 6 million UK insurance policyholders. It would affect individuals, businesses, economies and financial stability.
When the UK leaves the EU, those relying on a passport, which at that point falls away, may be in breach of local law. In most EU member states and the UK, servicing an insurance contract includes collecting premiums and paying claims. These actions are critical to cash flow, margins and capital requirements.
We are working with the Government to take action to ensure we have a functioning regulatory regime from day one by implementing the EU withdrawal bill. The aim of the work is to ensure that, so far as possible, the same rules and laws will apply on the day after exit as on the day before and provide certainty and confidence to business. On its own, the legislation does not solve the operational because they are symmetric in the sense that they affect both sides, and in important areas they result from the loss of the passport regime, which goes with exit. But, there are solutions for all these issues.
The bad solutions are to leave them to firms to sort out. These solutions would be expensive, messy and prone to risk, and would take much longer to enact.
The second best but distinctly inferior approach would be for each of the UK and EU authorities to enact solutions at the official level but independently.
The best solutions are mutually agreed and enacted so that they are consistent.
We need by the end of March 2019 a joint commitment by the political authorities to a well defined Implementation or Transition Period, which will create the space and support for the regulators to work with firms and political authorities to put practical solutions into place
It can be done, and there is a growing consensus on both sides that it must be done. A joint agreement to get on with this is in the interest of everyone involved. And, it will give much needed assurance to firms and markets as well as regulators.
I hope that the respective regulators can put in place a Memorandum of Understanding to give effect to a stable and orderly transition, which would acknowledge that firms are planning for a transition period to be in place. An MoU would be a means for the regulators to be transparent in the more practical issues around implementation, and thus that we are committed to such a period of time being available.
We have taken an important step in the direction of contingency arrangements by introducing the plan that we would use interim permissions as a means to deal with the risk that firms are left without authorisations without due warning. We think this is an important safeguard and a sensible way to underpin financial stability. I am grateful to the Government for committing to introduce the secondary legislation needed to put such an arrangement in place.
I cannot stress too much that we need these arrangements in place, and co-ordinated solutions are in the best interests of both sides. We are ready with sleeves rolled up to get on and put these arrangements in place.
A commitment to continued open markets is at the heart of the future, and regulatory standards operating in the public interest underpin open markets. At the heart of such an arrangement is mutual recognition of regulatory standards. This is quite different from passporting.
The EU has taken over 200 equivalence decisions on third country jurisdictions in financial services. So, when I hear that there is not a single trade agreement open to financial services, I think, “Really”. And, it would not have to involve a loss of regulatory autonomy.
The principles for mutual recognition would look a lot like the ones we already use to authorise the branches of banks from outside the European Economic Area, namely broad equivalence of regulation in terms of outcomes, supervisory co-operation and good information sharing. We would need to add on a robust dispute resolution arrangement, but this could be done. We are used to working very closely with other regulators, it is a big part of our job given London’s international role.
It is not sensible to imagine material regulatory divergence, especially in wholesale financial markets. It is a false concept. Markets are global and we cannot in practice diverge much in terms of regulatory outcomes, and regulatory arbitrage is not an allowable ground for competition.
Fragmentation of financial markets is not a price worth paying, for either side. Fragmented markets reduce diversification and transparency, thereby increasing risk.
Like all systems, the UK financial system is exposed to risks. Given its size, complexity, and global interconnectedness if these risks were to materialise they could have a major impact not only on the UK but also on the global financial system. Financial stability in the UK is thus a global public good. At the same time, understanding, mitigating and staying a step ahead of the evolving risks is such a complex system, as well as a constant analytical and policy challenge for UK policy-makers and regulators.
In the UK, the authorities recognise and take into account the global systemic financial nature of the financial system, and where necessary we enact higher standards to reflect this.
It is possible to have open financial markets based on mutual recognition of regulatory standards, and it is possible to assess the application of those standards to ensure broad equivalence.
Ian Youngman, author of the Brexit and Insurance report says, "This is the strongest speech yet from Bailey and highlights how important it is to do a deal now. But underneath it warns that the FCA has no control over what politicians do so insurers need to have contingency or actual plans in place now. With a Conservative party split on Brexit and hard liners treating real problems like an Oxbridge debate, there is a very real risk that grandstanding MPs with a vague and out of date notion that Britain can get along without trading within Europe, will sabotage the hard work of sensible technicians like Bailey."