Brexit or Remain? Decay, reform or freedom?
By David Worsfold
An Insurance Investment Exchange Roundtable:
Scott Farley, Director of Communications, International Underwriting Association
Dr Gerard Lyons, Chief Economic Strategist, Netwealth Investments and former economic adviser to Boris Johnson, Mayor of London
Richard Metcalfe, former Director of Regulatory Affairs, Investment Association
Bob Swarup, Head of Research, Insurance Investment Exchange and Principal, Camdor Global
Erik Vynckier, former CIO for Insurance, AB
David Worsfold, Contributing Editor, Insurance Investment Exchange
The opinion polls are tightening as we move from counting the weeks to the referendum on the UK’s continued membership of the European Union (EU) to now counting the days. As 23 June looms closer, the focus of the debate is becoming sharper and discussion of the consequences of staying in or coming out are gaining an ominous reality.
This was certainly the case at last week’s special Brexit Referendum Roundtable organised by the Insurance Investment Exchange to debate the issue and the implications for insurers.
There was one consistent message from all the participants, regardless of the likely destination of their ‘X’ on 23 June: things will never be the same for the EU again. The UK debate has changed relationships and attitudes to the European project forever.
One of the factors that has started to erode Remain’s once healthy lead in the opinion polls is the change in the tone and substance of the economic debate, said Gerard Lyons, who also helped establish Economists for Brexit.
“I was quite surprised early in the campaign to see so much of the economic stuff go unchallenged. The No campaign had decided not to fight the campaign on the economy which a group of us thought was quite bizarre. We feared it could be the only economic debate in history where there appeared to be only one side of the story.”
Just a few weeks ago the Remain campaign had a 27 point lead on economic issues according to one pollster. Last week the same poll showed the gap was down to just 9 points.
A Failed Project?
Bob Swarup – a self-confessed agnostic on the issue – believed many were not so certain in their faith in the EU as they once were and that this went some way to explain the changing tone of the debate: “Europe in its current form is a failing project. The only question is do we let it die in accelerated chaos through the catalyst of Brexit or do we let it die slowly over time like the Holy Roman Empire?”
He warned that the legacy of EU membership would be with us for a long time even if we decided to leave: “Exiting Europe on one level should make little difference to Britain because of its ability to trade goods and services globally. But it would also mean that a lot of the stuff that is cooked in – regulation, statutes and so on – cannot be unwound easily as some people think. We will often be trading with partners that have no choice in regulation, of which Solvency 2 is a very good example”.
This view was echoed by Erik Vynckier, a Belgian national: “Europe has always existed but in many different forms and in its current form, it can be seen as a failed project. But in many ways, the UK with its internal divisions is a failed project, Belgium is a failed project; there are two Italys; but they all work.
“However if you decide to leave you will find out pretty soon that you won’t decide everything. Exiting will be a very difficult project. There will be blood on the walls.”
He said that the oft made comparison with the trade deals Norway and Switzerland have with the EU was potentially misleading, partially because they negotiated from a position of never having been in the EU: “The EU wouldn’t let you in for free. It would extract certain rights for it and it would be very difficult for the UK to get into the same position as Norway or Switzerland”.
The Myth of Regulatory Nirvana?
This fear of decisions being made that the UK has little influence over is one of the dominant concerns in the London insurance market, said Scott Farley: “There is a deep skepticism about the benefits of leaving and certainly no expectation of some sort of regulatory nirvana. There would be an obligation to continue to meet regulatory requirements set by the EU but with no possibility of the UK to influence those future regulatory requirements”.
This could also have a detrimental impact on the increasingly important negotiations about a global approach to regulation: “Outside the EU as an independent country, it might be harder to tap into those negotiations if we are not part of one of the major trading blocs”, said Farley.
This concern about not being able to influence future regulatory debates in Europe and elsewhere was frequently raised, said Lyons, and was over-stated: “The government’s own competency report reviewing what expertise we have lost to Brussels and what expertise we have retained in the UK commented on the declining ability of Britain to influence the agenda in the financial services sector”. He contrasted this with the influence France wields in agriculture: “Nothing happens on agriculture in the EU without France agreeing to it”.
Richard Metcalfe agreed with the fears expressed about the aftermath of Brexit vote: “It would be quite difficult to have a clean break. There would be a long, slow negotiation over mutual recognition of regulations right across the financial services sector”.
He said a lot of the debate was about equivalence, something he felt wasn’t always readily understood: “Equivalence is not about individual regimes drawing up regulations and it is not about firms complying. I don’t think there is a roadmap to equivalence. It is about mutual recognition and that can be a very complex process. There is a fear that the equivalence process itself might be very laborious. It is not hard to construct a scenario where Eric’s ‘blood on the walls’ vision is reality and no-one is showing any willingness to address the equivalence issue”.
Vynckier said it could be a take it or leave it offer: “Equivalence is only going to be granted for peripheral issues, not for core issues. It will be like the EEA [European Economic Area] arrangements for Norway and others. If you want to do business in the EU, you have to accept EU regulation”.
Global Insurers, Local Markets?
Farley said the risks around negotiating access to the EU were a major concern of London-based insurers, especially if it has to be achieved in two years: “You can operate under WTO [World Trade Organisation] rules. You don’t have to have a trade agreement to trade. But the situation we have at the moment with regulatory equivalence is so much more advantageous, our members fear that in the absence of a deal they will have to re-assess how they access European markets”.
Swarup wasn’t so gloomy about the prospects of making progress on this front: “Given the size and clout of the financial services industry, there would be a lot of pressure on politicians on all sides to find a route to equivalence and compromise. There is also the added threat to policymakers of financial instability and contagion if resolution is a halting process”. He said the real concern would be about the potential costs: “The biggest fear among insurers would be about the cost of regulation. Most financial services companies have enormous costs of regulatory implementation and compliance. Take, for example, the money spent on Solvency 2 to date. The problem becomes greater should future regimes across the Channel diverge even slightly. They will have to invest more in IT, in reporting infrastructure, data warehouses and other esoteric bits that all add up to a lot of money. If we come out, will people invest in building new regulatory and capital structures until they are clear on what the future will look like?”.
The UK’s high standard of regulation was seen as an advantage when trading around the world, said Farley: “Regulation is seen as a strength in the London Market. The idea of having to duplicate those efforts if we are outside the EU with companies having to report to a regulator in the UK as well as in Europe is a big driver with our members to remain in the EU”.
This could force companies to re-assess the legal status of their London offices, especially if the passporting rights they currently enjoy are threatened. Vynckier agreed that this was a legitimate concern: “I don’t think London would continue to have the same status. A lot of the success of the City has been in developing business in Europe, including in the Eurozone. That will be much harder.”
For Metcalfe this threat wasn’t so clear cut: “The equivalence issue definitely looms large in the financial world but cross-border trade hasn’t really worked. At a retail level, it is often about consumers only trusting local brands so is it that valuable to UK financial services?”
Where is the competition to London as an insurance centre, asked Lyons: “No-one says where the business can go apart from London. It is a perceived risk rather than an actual risk. We certainly shouldn’t be complacent but insurance has a high level of expertise in London and there is no other city in Europe where the business can go”.
He was also dismissive of the fears of former European partners taking a vindictive stance if we vote to leave: “I think people will throw their toys out of the pram to start with. I think we have to let the initial euphoria on one side and anger on the other side calm down. It will then be a matter of hard facts and economic reality bringing people to their senses.
“There will be some downturn if we leave – I call it the Nike swoosh. It is difficult to imagine that there will not be some uncertainty. I don’t think jobs will be lost. There will be a period of uncertainty but then the economy will pick up”.
The Day After?
While much of the focus of the wider debate as well as the debate within the insurance market has been about the consequences of Brexit, the consequences of voting to remain a member of the EU are by no means clear.
“If we stay in, I think that tensions and the push for reform evolve anyway”, said Swarup, “because the exit genie is out of the bottle. Look at the Scottish independence referendum. The vote was to stay in the UK but you can argue that the real winner was the SNP.
“Even if the vote is 60/40, it still means that a significant minority wanted to leave and had good reasons for voting to do so. Migration will still be a huge issue as the internal tensions the referendum has exposed won’t go away. Many others have the same underlying tensions – France, Spain, even Germany. Britain could still end up exiting but over a longer period as the façade crumbles”.
The debate about Britain’s relationship with Europe won’t end with a Remain vote, said Metcalfe: “We will still be having a similar debate in 20 years time. I used to be worried about this sort of hokey cokey relationship with Europe but I worry less now because many other countries have concerns about Project Europe. But if we do stay in, we must engage better because key issues won’t go away. For instance, even if we vote to remain I don’t think the ECB [European Central Bank] will have given up on its mission to tie the dealing of Euro denominated instruments to locations within the Eurozone. They will not go away on that”.
Europe was a changed place as a result of the UK debate, said Vynckier: “I think the high tide for the EU was the 1990s. It was definitely the high point, especially with the initial enthusiasm for the Euro. It was a propellant for ever further union but now it has become a problem. The Brexit debate has started a wider debate about reform in Europe”.
Lyons acknowledged that such a debate had started but wasn’t optimistic about its chances of progress: “If we stay, part of the challenge is getting to this reformed EU. I feel reluctantly that we will be unable to reform the EU. I just don’t think it is in its DNA. Us staying in having not achieved much will lessen our bargaining position anyway. The EU is primarily set on its path towards ever closer union whatever the Prime Minister may say. As the French and Germans have said, the survival of the Euro is key to the project – and the Euro need greater centralisation.
“Remaining is not a vote for the status quo. It is a vote basically to see more powers over the financial services sector exercised outside London, outside the UK”.
Swarup warned that people musn’t misinterpret a Remain or Leave vote as an end of the discussions about the future of Europe and the UK’s relationship with it: “The debate probably intensifies after 23 June regardless. Remain or not, Britain still needs to do more than merely paper over its ideological divisions in the aftermath and Europe will have to address the growing sense of disenfranchisement and pressures for change across the continent. The real debate begins the day after.”