The Committee for Exiting the European Union heard evidence from the Association of British Insurers, the City of London Corporation, and the Commercial Broadcasters Association on the implications of the UK's departure from the EU for the British services sector. I asked them about what an EEA based Brexit would mean for the services sector.
Stephen Kinnock: Good morning. The fundamental challenge with this process is the constant attempt to create a bespoke deal and to create something new in a situation where there is a tremendous amount of time pressure and a lot of political good will has been burned. In that context, have your respective industries looked at the European Economic Area as a model for Brexit, particularly given the fact that it is a well-known and well-established agreement that industries and Governments could slot into. I would be very interested in hearing from the panel on your views on an EEA-based Brexit as potentially solving so many of the challenges that you have raised today.
Huw Evans: We have looked at that and we are not fans of the arrangement. I would agree with your starting point that, given the situation you describe, it is imperative to try to find working solutions. That is why many parts of the insurance market have gone ahead and set up subsidiaries in the European Union, to be ready by next year to enable them to carry on transacting business in the EU. They will be regulated in that manner. That has been a very notable characteristic of the insurance market’s response to the Brexit referendum. They have done that already if they need to be absolutely sure they can write new European business next year.
That colours our view as to the merits or otherwise of an EEA approach, because if the firms that absolutely need a European licence to operate have gone ahead and set up a subsidiary and then the other firms are largely domestic players, the big disadvantage of being in the EEA is to be a rule-taker, both for your domestic business but also when you have already signed up to EU rules with the subsidiary that you set up.
Talking to our Norwegian counterparts, with whom we have a very close relationship, they have said to us, “Do not become us”. Their view is that for a market size of ours—over 20% of the EU insurance market—it would be entirely unsuitable to be in the EEA model, to be a rule-taker and to not have any influence on how those rules are made.
Particularly I would draw out a distinction here for the long-term savings market rather than the general insurance market. For the long-term savings market, rules in the European Union—we saw this with the development of Solvency II—are driven by the very different tax and welfare systems that operate within the member states, which inevitably affect how their pensions and long-term savings markets work. For us to end up in the long-term savings market being subject to a set of rules, whether in Solvency II or any other directives, that were driven by the welfare and tax systems of the member states would potentially be very damaging for the UK, particularly for the ability to write annuities, which are a feature almost unique in Europe to the UK market and which we had to fight very long and hard to get Solvency II to recognise when we were in the room. We would be very fearful that being out of the room would see us disadvantaged on that, particularly given there is a big review of Solvency II happening in 2020, when the directive could end up being rewritten.
Catherine McGuinness: I would agree with Huw. The consensus around the EEA from the sector that we hear is that, first of all, the question of rule-taking would not be appropriate for a sector of the size that we house here in the UK and, indeed, for the amount of risk that we need to manage here in the UK because of having that sector here. Rule taking would not be appropriate and it would not give the sector the access that it needs.
Stephen Kinnock: Although it includes passporting. You would have passporting if you were in the EEA.
Catherine McGuinness: We would still be a rule-taker, which would not be appropriate for us. We would not be able to develop in the way that we need to and we would not be able to control risk in the way that we need to.
Adam Minns: To be honest, I look at the EEA longingly and think, “That would be fantastic”. Being a rule-taker has issues, but, as I mentioned before, we are so in excess of EU minimum standards that, while not perfect, we could live with that if that gave us access to EU markets.
Failing that, as I have said, we do not really desire more flexibility at the moment. I wonder if there is room for discussing some sort of carve-out for audio-visual in terms of mutual recognition and then we end up going down the list to enhanced equivalence.
Can I just mention very quickly something in response to what Mr Whittingdale mentioned about which countries would require you to have that significant presence? We have had a chain of different embassies coming to the UK to woo the international broadcasters. Some of them may say, “Look, we will only be pursuing very minimum requirements for you to be based here”. The problem will come from a third-party country then crying foul and saying, “That is not on”, especially if they have a lot of channels moving over there. I just wanted to clarify that.
Mr Whittingdale: To clarify, you are suggesting that a third country would apply to the ECJ that a regulator’s recognition was illegal because there was not sufficient presence for them to grant a licence.
Adam Minns: To the Commission.
Stephen Kinnock: Mr Derrington, what do you think about the EEA?
Giles Derrington: We have not taken the approach particularly looking specifically at models, because ultimately that is broadly a political decision. What we have done is looked at where models do not provide enough for the sector, which is why the association agreement approach that the White Paper takes seems to be a potential landing zone.
For us we do not see a free trade agreement model—a “CETA plus plus plus”, as it were—as being able to provide in any way the types of regulatory support we need. Services are thoroughly undeveloped, even within CETA. We move past that and then you are into association agreement, EEA type territory. We have not particularly made a distinction between the two.
There may be areas, if Government wish to express them, where there may be some benefits from flexibility. We have not, as I say, been able to identify them ourselves, not least because of our understanding of the domestic approach to some of these regulatory areas where the UK Government are in lockstep with the EU. If there is a change in that then an association agreement potentially allows you to create carve-outs in a way the EEA does not. It is a little bit difficult to know fundamentally what the difference is. For us the big Rubicon to be crossed is between a standalone trade agreement and something that is not quite full third-country status, which allows you then to do things like wrap around for data protection, so that the ICO has a continued presence and access to the one-stop shop, et cetera. The association agreement seems to give us that. You would get the same with the EEA.
Stephen Kinnock: Just going back to this rule-taker issue, perhaps to Mr Evans and Ms McGuinness, given that you have all made it absolutely clear that highly integrated trade in services with the European Union is vital for the industries that you represent, is it not therefore inevitable that we will be a rule-taker? It is not possible to export services into a market without accepting the rules of the market that you are exporting into. With that in mind, would you rather have equivalence, which is what seems to be on the table from the European Union, or would you rather have the EEA?
Huw Evans: It is partly a question of timing. If Parliament had reached the view two years ago that there was a consensus around going after an EEA model then the judgment would have been more balanced, because many of my members who have spent the last two years setting up subsidiaries in Belgium, Luxembourg and Dublin to get market access to enable them to carry on running their European business—and, indeed, Lloyd’s of London has had to do the same in Brussels—would not have had to have done so, because the EEA model provides market access. That horse has bolted. They have spent the last two years doing that. They have done it. They have the market access they need to keep their businesses running.
For those of my members who then have UK businesses left, it is the worst of all worlds, with the idea that having spent two years setting up a subsidiary in, say, Luxembourg, their UK entity is then going to be regulated out of Brussels through rules that they have no say over. They accept it for the business that is happening in the EU, but for them, as for my members who are entirely domestically based, the prospect of being regulated out of the EU with no say on the rules is a problem, particularly for insurance and long-term savings because, unlike banking, our regulatory standards are not internationalised. They are not globalised. The vast majority of regulation for insurance and long-term savings is done through the EU. There is not the equivalent of the Basel accords that you have in banking, which set international global standards that are largely then mirrored in EU regulation. For insurance and long-term savings, Brussels is where it is at and where it is largely done, so for us it is much more material to be in a position where we have to take those rules.
Notwithstanding all of that, you are right to say we have to now look constructively at how to make an equivalence model work. We are at the beginning of that negotiation. It is an ambitious ask. We have to make sure that there are arrangements in place, for example particularly around reinsurance, so that Lloyd’s of London and the large wholesale GI businesses can operate from day 1. We have to make that work.
Stephen Kinnock: Ms McGuinness, specifically on this point, given that the EEA delivers passporting, you would still rather have equivalence than the EEA against that backdrop.
Catherine McGuinness: I would go back to the point about rule-taking and rule-making, and the need for us to retain autonomy. I have to say that, for two reasons, I think there will be a great degree of alignment between at least the regulatory outcomes that this sector faces here and this sector faces within the EU. The first reason is the access point that you make: the EU, for the businesses that want to work in their markets, will expect their regulatory outcomes to be met, but also because being well regulated is part of the USP of the City of London; good regulation that complies with global standards is something that we will continue to want to comply with them.
What Huw has just illustrated, though, is how there are differences even within one sector on how they view regulation, depending on how their business is structured and where they are focused. It is important to note that we have been really influential in shaping EU regulation as it has developed over the years and, if we are outside the room, it may very well move in a different direction that we are not comfortable with.
Stephen Kinnock: That is inevitably going to happen on 29 March anyway, because one thing we know with Brexit is we will leave the political institutions. Given that we know that that is going to happen and given that we know we will not be in the room from 1 April, your view remains, though, that equivalence is preferable to passporting.
Catherine McGuinness: Certainly not equivalence in its present form. What we need is to seek the greatest possible neutral market access, as I say, for consumers and businesses here but also within the EU. It is a bit difficult to pick between one and the other, especially when we do not know exactly how equivalence will be enhanced as we go forward with negotiations, but, as I say, the bottom line needs to be, I suggest, the greatest possible neutral market access to enable global markets to carry on serving customers across borders.
Giles Derrington: Can I very quickly make a further point on that? For us, a key issue in this is the extraterritoriality of some EU regulations as they apply to digital. We already have data protection law. We are going to have e-privacy, which will likely come in after we have left. On those things it is far better to have some level of regulatory influence, even if that is observer status, because we will have to comply with them anyway. For our members, including, for example, our American, Japanese or wherever members, who invest a huge amount of money in the UK, they do so on the basis of the UK being a strong domestic market, yes, but being able to serve the European market and the UK being able to continue to have some regulatory influence over things that will apply to them.
Stephen Kinnock: Something like membership of the EEA Joint Committee and observer status on EU agencies that comes with EEA agency would probably work, as damage limitation.
Giles Derrington: Broadly speaking, yes. The White Paper talks about, for goods, some kind of observer status on some of the committees and agencies. It is not entirely fleshed out exactly what that means. There needs to be more detail on that, but you could see the model in the White Paper being able to supply that. It is just a question of ambition.