Steve White spoke at the Insurance Institute of Manchester
21st April 2017
Insurance Institute of Manchester – April 2017
Good afternoon everyone.
Thank you for that welcome and many thanks to your local institute for inviting me to speak to you today.
I’m going to talk for around 40 minutes and am happy to take your questions afterwards.
Today, the 19th April, has seen some momentous happenings down the years.
On 19 April 1587, Sir Francis Drake led his ships into Cadiz harbour and sunk the entire Spanish fleet.
In 1839 on this date, the Treaty of London was signed, constituting Belgium an independent kingdom and Luxembourg a grand Duchy.
On this date in 1938, General Franco declared victory in the Spanish civil war.
And on the 19th April 1980, Ireland’s Johnny Logan won the Eurovision Song Contest with “What’s Another Year”.
Who remembers Johnny Logan?
For those struggling, here he is!
Now getting back to Brexit.
The subject of the UK exiting the European Union, or Brexit as it is more commonly known, has had more column inches written and more TV and radio airtime than almost any domestic issue I can recall in my lifetime.
And we now have a general election where Brexit will be the dominant theme.
Today I will specifically look at the key Brexit issues affecting insurance brokers but, as you will quickly notice, most of these are not exclusively issues for brokers – they do read across into other areas of our market.
We will look at how BIBA identified the relevant issues and look in some detail at the issues themselves.
We will consider BIBA’s position on each and analyse the lobbying we have undertaken.
Finally we will look at the negotiations for our Brexit.
All this in 40 minutes!
So let’s kick off and retrace some of the steps we took in arriving at our Brexit issues.
And to do that I’m going to start by reminding you of BIBA’s governance structure.
We have five advisory boards that represent the variety of broking firms in BIBA membership.
These advisory boards are comprised of senior people from within our member firms
There are separate advisory boards for smaller brokers, larger brokers, international and wholesale brokers, networks MGAs and others, and finally an advisory board comprising the regional chairs from each of our 12 regions.
These advisory boards meet frequently and address issues that are relevant for their community.
Sometimes an issue cuts across several advisory boards, sometimes an issue is unique to an advisory board for example possible changes to US border tax policy is almost exclusively an issue for the international and wholesale broking community.
With regards to Brexit, this is a topic that is relevant to all but had nuances that are much more relevant to some advisory boards than others.
The chair of each advisory board sits on the main BIBA Board and these chairs were able to bring to the boardroom table the relevant issues and agree our positions.
But it didn’t stop there.
Each autumn we undertake a tour of our regions.
This involves myself and my executive director Graeme Trudgill conducting 15 two hour behind closed doors events exclusively for members.
At these sessions we discuss what we have done on their behalf during the year and what issues they would like us to lobby on in the forthcoming year.
These events get us in front of over 600 senior people from member firms and we use the output to formulate our annual manifesto.
The autumn tour last year allowed us to test our early ideas about the key Brexit issues and to pick up some new issues, all of which feature in the Brexit section of our 2017 BIBA Manifesto.
Now clearly BIBA does not operate in a vacuum and so we engaged with a number of other bodies, to sense check our positions, to seek some common ground and to present a united front – a one voice approach.
We met separately and on several occasions with the Association of British Insurers, the CII, the Confederation of British Industry, the London and International Insurance Brokers’ Association, the London Market Group, Lloyd’s, the Financial Conduct Authority and the Association of Professional Financial Advisors.
This broad engagement has enabled us to fine tune both the key issues affecting insurance brokers and our position – what we are calling on Government to do in response.
So, here are these key issues and let’s explore each one in turn.
Let us start with the Single Market.
One of the challenges of lobbying is making sure that you keep abreast of the policy maker’s thinking – in this case the Government.
During the autumn we were all getting mixed messages on whether we would or would not remain in the Single Market.
Why was this important for insurance brokers?
As at August last year, some 2,758 UK insurance intermediaries had passports to provide their services into other EU States.
The most popular EU States for UK intermediaries to passport to are, in order – Ireland, Spain, France, Germany, Italy, Portugal, Belgium and Cyprus.
There are no reliable statistics to show how many of these passports are being used as opposed to lying dormant.
However, what we do know is that in the London Market, 75% of intermediaries do use their passports and this cross-border trading generates some £7.8bn revenue.
But its not just UK insurance intermediaries that utilise passports for freedom of services or freedom of establishment.
There are 5,727 insurance intermediaries in other EU states that have a passport to trade in the UK.
The most popular EU states for those passporting to the UK are, in order – Czech Republic, Austria, France, Belgium, Germany, Ireland, Italy and Luxembourg.
This is why we have tweaked our language around passporting and now call for mutual market access.
What has become clear this year is that Government is not likely to negotiate to remain in the single market and so passporting as we currently know it will cease.
However, we have been encouraged by the Prime Minister’s positioning in recent weeks in her call to pursue a bold free trade agreement with the EU, seeking the greatest possible access.
We have also been speaking to our fellow broking trade bodies around Europe via our membership of BIPAR, the European Federation of Insurance Intermediaries, encouraging them to lobby their Ministries about the importance of this mutual market access.
If Government is unable to successfully negotiate a whole economy solution to single market access then we are calling for a sectoral approach.
Financial services is the UK’s largest export item and with commentators suggesting that deals may already have been promised to the automotive industry – think Nissan and then the recent Peugeot Vauxhall deal – we think there is good cause for Government to view financial services, especially insurance, as a special case.
Aligned to accessing the single market is what happens the day after we leave the EU.
Businesses across the financial services spectrum are all concerned about what is being termed a possible cliff edge.
It will be important, in the event of change, that firms are able to transition from the old world to the new world, rather than have to leap from one to the other.
In this regard, we have reminded Government that when the UK joined the EU back in the 1970’s, there was a seven year transition.
Having discussed transitional periods with our larger members and representative bodies from across financial services, there is widespread support for a five year transitional period.
We will talk more about transition a little later.
Our second Brexit issue is equivalence.
Where a State is not a member of the EU or the European Economic Area, the EEA, it may be able to access the single market via provisions set out in relevant directives, under what are known as Third Country arrangements.
Let’s take the second Markets In Financial Instruments Directive, or MIFID2 as it is better known, as an example.
Of all the provisions of the MiFID II texts, the third country provisions were subject to some of the most heated – and high
profile – debate and lobbying.
Articles have dropped in and out of different drafts at a confusing rate, and it was difficult to keep track of the latest developments.
The term “third country” refers to jurisdictions outside the EU and “third country firms” refers to entities incorporated outside the EU, whether they do, or seek to do, business by way of a branch established in the EU, or on a cross-border basis
– i.e. providing services to persons in one jurisdiction from a place of business in another jurisdiction without any establishment in the client’s jurisdiction.
With the review of MIFID, the Commission has attempted to create a harmonised regime for granting access to EU markets for firms in third countries.
However, the regime is limited in scope to the cross-border provision of investment services and activities provided to per se professional clients and eligible counterparties.
And here is the nub – currently equivalence only applies to certain types of customer, and equivalence provisions only apply to MIFID 2 and Solvency 2.
They are specifically excluded from both the Insurance Mediation Directive and the Insurance Distribution Directive, which will come into force in the UK from February next year.
This is a point that we have had to make to several senior politicians, who hadn’t noticed the difference approaches to Third Countries in the various Directives.
So if Government is unable to successfully negotiate the bold free trade agreement with the greatest possible access that Theresa May spoke of, then seeking an extension of the Third Country, or equivalence provisions, becomes very important.
So what might equivalence entail?
In an increasingly globalised world market, national and international authorities have to work together to develop effective policies for regulating and supervising financial markets.
In particular, the financial crisis emphasised the global interdependence of financial markets and the need for international cooperation amongst rule makers and supervisors.
The 2008 G20 summit in Washington agreed on a common roadmap for financial regulatory reform in order to tackle the global financial crisis and to ensure a level playing field.
The G20 also committed itself to fight against protectionism and to refrain from raising barriers to investment.
Most EU financial laws contain a clause that grants market access for outside countries with rules and enforcement at least as rigorous as Europe’s.
The European Commission makes those determinations for each law, judging one country at a time.
EU regulatory agencies for banking, securities and insurance provide analysis for those decisions, but the call is made in Brussels.
The UK’s equivalence to the current rulebook is beyond question.
Bank and insurer capital standards, conflict of interest protections for asset managers and securities dealers — Britain’s “gold plated” rules tend to exceed, not just meet, the demands of the Europe’s “single rulebook.”
So if we leave the single market and agreement cannot be reached for a bold free trade agreement, then we will argue for Government to pursue changes to the equivalence regime that will allow the UK to be treated as a Third Country for insurance distribution purposes.
A consequence of equivalence however is that whilst we will have to maintain our equivalence to new EU rules, we will have no influence in the rule writing process, as our officials will no longer be at the EU Parliament, within the EU Commission or sat at the EU Council table.
Should this scenario play out then BIBA’s membership of our European association BIPAR and our seat on the World Federation of Insurance Intermediaries will become increasingly important.
Our third Brexit issue is the UK regulatory regime itself and here we are calling for change.
One of the consequences of the banking crisis and the new regulatory architecture that followed is now being seriously felt.
The Financial Services and Markets Act 2000 contained a general duty to have regard to the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom.
One of the criticisms of the Financial Services Authority post banking crisis was that it had used that general duty to give the banks a light supervisory touch and therefore not spotted some of the problems.
The new Prudential Regulatory Authority PRA and Financial Conduct Authority FCA regime, underpinned by the Financial Services Act 2012, has no such general duty and as a consequence no one is looking out for the broader interests of the UK financial services market.
Let me offer you a practical example.
We understand that a Bermudan-based insurer recently was looking to relocate to Europe.
They identified London and Amsterdam as their two preferred bases.
They wrote to the regulators setting out their high level plans.
The UK regulator responded with a lengthy email containing links to various sections of the rulebook and the myriad of forms that would need completing.
The Dutch regulator, on the other hand, rang them up and said “Let’s take you out to dinner and discuss how we can help you relocate to Amsterdam”.
Hence we are calling for regulatory change – our stated preference here is for the FCA and PRA to have a statutory duty to take into account the international competitiveness of the UK financial services sector in the way they regulate and supervise.
Failing that, strong formal guidance from HM Treasury.
After all, financial services is the UK’s largest export and in a number of the major markets that we will increasingly come into competition with, for example Singapore, Qatar and Dubai to name but 3, this is what happens.
In addition, we would like to see an inward investment unit at both the FCA and PRA – dedicated specifically to the task in hand.
Our fourth BREXIT issue is one that has received more column inches than the others, and that is around employment of overseas nationals.
Of the 3.2 million EU citizens living in the UK, there are no reliable figures for how many EU nationals are employed in the UK insurance market.
However, we understand that there are around 2,400 professionals from other EU states employed in the London Market and there are certainly several thousand UK insurance professionals working in other EU states.
One BIBA broker runs a multilingual call centre for a large international manufacturer that requires insurance policies to attach to their product throughout Europe.
As a minimum, the call centre requires 40 EU nationals with experience from 30 different nations speaking specific European dialects.
Without the ability to employ these specialist staff the broker could no longer retain this contract and would lose 25% of their business with millions of pounds.
There is a broad consensus for a solution but it does appear that these workers could be used as pawns in the negotiating process, something we feel is totally unacceptable.
Our next Brexit subject is motor insurance and here there are a number of issues which I will outline for you.
The Road Traffic Act and its various amendments ensure that the UK meets the minimum harmonisation requirements of the EU’s Motor Insurance Directives.
This enables drivers to travel across the EU safe in the knowledge that their motor insurance policy provides at least the minimum cover required in each EU State.
Once the UK leaves the EU, this ability for UK motorists to take their cars to continental Europe and be covered the same way as now will be called into question.
We understand that the Department For Transport has employed a new official specifically on Brexit and motor insurance issues.
We will be keeping in contact with him on this and other key motor insurance issues.
Once such issue being Green Cards.
DFT agree with the insurance sector that even if we are outside of the EEA there is still a benefit in enabling British motorists to drive across the EU without strict checks at borders of motor insurance documents (and for EU drivers coming here).
Therefore they are scoping legislation and looking to get it approved with the EU.
DFT do not want to revert to the old green card system, especially because of Ireland and issues around a possible North / South border.
Various estimates suggest that currently somewhere between 15 to 20% of the capacity in the UK motor insurance market is written out of Gibraltar – currently via a passport off the back of the UK’s membership of the EU.
Gibraltar is an overseas territory of the UK and we are led to believe by both HM Treasury and the Foreign and Commonwealth Office that the Gibraltar Order can be amended fairly easily with secondary legislation to allow business to follow to and from the rock.
However, this will remove the passporting rights that Gibraltar currently enjoys with the rest of the EU so it will need to decide how it wishes to proceed.
The new DFT official is looking at this too and they are aiming for mutual recognition of EU/ GB driving licences.
One of the consequences of single market membership is the duty to comply with judgements from the Court of Justice of the European Union, the CJEU.
You may recall the decision in the Test Achats case that led to the banning of rating simply by gender.
There has been a more recent case, Vnuk, which has potentially far reaching implications for motor insurance.
For those for whom the name Vnuk means nothing, let me elaborate a little.
Mr Vnuk is a Slovenian farmer.
He was up a ladder in a hay barn when a tractor towing a trailer reversed into the barn, knocking Mr Vnuk off his ladder and causing him injuries.
Mr Vnuk and his solicitor tried unsuccessfully to claim against both the motor policy and liability policy.
His lawyers went away and studied the EU Motor Directive, where they found the following definition of what constitutes a vehicle for the purpose of the legislation:
‘vehicle’ means any motor vehicle intended for travel on land and propelled by mechanical power, but not running on rails, and any trailer, whether or not coupled;
They then pursued a claim through the courts all the way to the CJEU, arguing that the Directive had been incorrectly implemented.
And the CJEU, whose role as judges is to interpret the law agreed.
The consequences of this decision are huge.
It brings into the scope of motor insurance some 43 different types of vehicle that previously didn’t need insurance – kids electric cars, golf buggies, mobility scooters, ride on lawnmowers and even robot vacuum cleaners!
It also has the potential to have a catastrophic effect on motor sport.
Representatives of this sector tell us that it currently adds in excess of £10bn to the UK economy each year directly employing 60,000 people in over 9,000 businesses.
We successfully lobbied in Europe for a consultation to amend the Directive definition of vehicle to include the words “used in traffic” but following Brexit the British Commissioner Lord Hill, who was driving this change forward has resigned and therefore the urgency and importance has been lost.
We were winning, but Brexit has put this on hold to an extent. However we continue to lobby on this and are working closely with our peer associations in Europe, especially with the Irish, the Germans and Maltese.
Our spies in Brussels tell us that a technical correction is planned to the Directive’s definition of vehicle to include “used in traffic”, which could be concluded later this year.
This would resolve the threat to motor sport along with the majority of the unintended consequences for those newly in-scope vehicles.
Outside from the specifics of the Vnuk case, the question of the UK’s adherence to CJEU decisions is one we will return to a little later.
The penultimate Brexit issue concerns travel insurance and, specifically, the European Health Insurance Card, or EHIC.
The EHIC is issued free of charge and allows anyone who is insured by or covered by a statutory social security scheme of the EEA countries and Switzerland to receive medical treatment in another member state free or at a reduced cost, if that treatment becomes necessary during their visit (for example, due to illness or an accident), or if they have a chronic pre-existing condition which requires care such as kidney dialysis. The term of validity of the card varies according to the issuing country.
The intention of the scheme is to allow people to continue their stay in a country without having to return home for medical care; as such, it does not cover people who have visited a country for the purpose of obtaining medical care.
Nor does it cover care, such as many types of dental treatment, which can be delayed until the individual returns to his or her home country.
It only covers healthcare which is normally covered by a statutory health care system in the visited country, so it does not render travel insurance obsolete.
As a consequence, the EHIC helps keep travel insurance premiums low for holidays in Europe.
I asked a senior travel underwriter who said “Without a doubt losing the benefits of the EHIC will completely change the rating for European travel insurance.
With 55% of claims being for medical expenses and 25% for cancelation due to medical reasons the net impact would be on 80% of claims, so we would see a significant increase in rates”
Following Brexit, it is unclear about the future of the EHIC but we believe it is important to maintain an equivalent reciprocal agreement.
On the basis we have reciprocal health agreements with Australia, New Zealand and many others outside of the EU then there is a deal to be done.
Our final Brexit issue is Trade Credit Insurance.
Uncertainty resulting from the plans for EU exit may lead to fluctuating exchange rates, fewer imports and exports – all of which might affect businesses’ performance.
This may bring about uncertainty in trading and could lead to an increase in credit risk.
Trade credit insurance protects businesses against both commercial and political risks.
This gives businesses the ability and confidence to extend credit to new customers and improves access to funding.
Trade credit insurance therefore has an important role to play in managing increased credit risk and can bring some certainty to business in these uncertain times.
We are calling for Government to work with us and the trade credit sector to explore how trade credit insurance can assist UK business in navigating through the issues and changes that EU exit will bring.
So that is a quick run through of the key issues.
Let’s now look at our lobbying activities and, in particular, who we have met and what did we discuss.
At last autumn’s Conservative Party Conference, we took the opportunity to speak to some of the most important players in the EU Exit arena.
As you can see from the slide here, we spoke with Liam Fox, who will be in charge of negotiating the UK’s new trading arrangements with the EU.
We discussed the importance of barrier-free tariff-free access to the single market.
We had similar conversations with Pritti Patel, who is now Secretary of State for International Development.
We also discussed with her the importance of clarifying the position of UK nationals working in the EU and EU nationals employed in the UK.
We met Simon Kirby, the Economic Secretary to The Treasury, both at the Conference and subsequently back at his office at Whitehall.
We went through most of these key issues with Simon and followed it up with more detail.
Most interestingly at the Conservative Party Conference, we managed to directly question the Prime Minister at a Q&A session during a private lunch for business leaders.
We asked her specifically about single market access and how important it was for the insurance broking sector.
She gave a lengthy and supportive answer.
Whilst not committing to single market membership, she clearly recognises the importance of access and her more recent comments in her Lancaster House speech around negotiating for a bold free trade agreement with the greatest possible access are encouraging.
We have also had a number of meetings with key civil servants in a number of Government departments.
We meet officials from HM Treasury on a frequent and structured basis to discuss many of the issues in our manifesto.
We have had several meetings with Treasury officials on Brexit issues, including a meeting specifically looking at issues relating to Gibraltar, where we were joined by officials from the Foreign & Commonwealth Office.
A week after the referendum, I attended a meeting at what is now the department for Business, Energy and Industrial Strategy, where around a dozen senior insurance leaders had a roundtable discussion about what at that time were the early day Brexit issues.
The day after the referendum we had a meeting scheduled at the Department For Transport with the motor insurance minister Andrew Jones.
Despite the chaos that the result was causing at the time, we had a good hour meeting with Andrew, where we set out our motor insurance concerns.
Then in the last week of March we got to meet officials from the Department for Leaving the EU, DEXU as it is known and discussed all our issues in full.
Finally on our face-to-face Parliamentary Brexit engagements, the All Party Parliamentary Group on insurance and financial services held a special session on Brexit. I was joined on the panel by the ABI, the London Market Group, the Association of Professional Financial Advisors and a lawyer.
The session demonstrated clearly that on the key EU Exit issues, the sector was giving the same clear message – and that is exactly what politicians like when meeting lobbyists – a clear one voice message.
Lastly on lobbying, we have written to a number of the most senior politicians in this process, setting out in some greater detail than I have had time to set out today our points on the key issues.
We have written separately to Theresa May, Boris Johnson, David Davis, Liam Fox, the Labour Party Brexit team and chair of the Treasury Select Committee Andrew Tyrie.
We have written to and met with Baroness Hayter, the leading Labour Party peer in the Lords and we have discussed our issues with Michael Russell, Member of the Scottish Parliament and Minister for UK Negotiations on Scotland’s Place in Europe.
With Article 50 now triggered, attention turns to the negotiating process and the negotiations themselves.
Let me share this thought with you.
Do not underestimate the harm done to our negotiating position by the former Conservative Party leader and my former MP Michael Howard a fortnight ago when he suggested that the UK might be prepared to go to war with Spain over Gibraltar.
Or the subsequent Sun front page headline Up Yours, Senors!
Language like this from either side will do the negotiating process no good whatsoever.
The process of exiting the EU, put simplistically, is a three stage process.
Firstly the Article 50 divorce, in other words the terms by which we will exit.
The second stage will be the transitional arrangements, in other words what measures might be in place to cover the gap between leaving and the new trading agreements being up and running.
And thirdly are those new trading arrangements themselves.
It would be premature to discuss the third stage today so let’s restrict ourselves to the first two.
When considering the Article 50 negotiations and the terms of the divorce, there are 5 key issues that we’ll take a quick look at before I close.
The first of these relates to the UK’s contribution to the EU budget.
And here there are three factors to take into account.
Firstly, there is the legacy issue.
How much does the UK owe the EU and how much does the EU owe to us.
For example, it is estimated that the UK’s liabilities for research and development programmes alone might amount to around £60bn.
Secondly there are ongoing budgetary considerations.
Put simply, how long does the UK continue to contribute to the EU budget and to what do we contribute.
And thirdly, does the UK continue to contribute to the EU budget post Brexit.
The second broad issue is the delicate question of what happens to those EU citizens currently living and working in the UK and the UK citizens living and working elsewhere in the EU.
And here again there are three key considerations.
Firstly the difference between residence and transient working
Secondly the position of overseas nationals during any period of transition
And thirdly the legacy issues, including social security and pension issues and arrangements.
The third broad issue is legal separation and the process that will disentangle us from the EU.
The EU commission and the UK will work collaboratively through thousands and thousands of pages of legal text to ensure the UK is written out of all treaties.
This is not a controversial issue but will need careful oversight to ensure there are not any residual liabilities for the UK.
The fourth broad issue is Northern Ireland and its border with the Irish Republic.
The Irish government has written to the EU president about the uniqueness of the UK Irish relationship.
The issue is not yet high on the EU agenda but the Irish are pushing.
With many citizens traveling daily across the border, the question of a passport union has been floated.
And a customs union would similarly allow free movement of goods and services between the North and the Republic.
The possible absence of an agreement is causing consternation in Dublin and Westminster and this clearly is a significant issue that will need to be carefully addressed during the negotiations.
However, it is not a unique situation – there is a similar issue at the Lichenstein / Switzerland border, although this is a much smaller border geographically than that in Ireland.
The final issue is probably the most important of the five and that is transition.
There appears to be mutual recognition of the importance of a transitional period to be in place to cover the gap in time between the UK exiting the EU and new trading arrangements being put in place.
The EU acknowledged the importance of transition back in December and Theresa May reiterated the point in her Lancaster House speech earlier this year.
The terms of a transitional arrangement would need to be negotiated, but from an EU perspective the four key demands will be that during the transitional period;
Firstly that the UK will not be at the table on decisions and rules, so will be a rule taker, not a rule maker;
The UK will continue to accept the four freedoms, including the freedom of movement of people;
Thirdly that the UK continues to accept and implement EU law and is subject to the decisions of the CJEU; and fourthly
The UK continues to contribute to the EU budget.
As a consequence, the UK would be a member in all but name but be a rule taker, not rule maker.
From a UK perspective the two key issues here would be how palatable would it be to pay to get out of the EU and how can we water down these 4 demands.
Politically, the timing around phasing out of the four freedoms is likely to be the most sensitive.
The final question to consider here is how long a transition period might last.
It is understood that the UK has a preference for a three year transition whilst in Brussels there is support for a five year period.
Indeed at EU level we believe there is some support for a 7 year period – which would equal the transitional period the UK enjoyed on first entering the EU – and a seven year period also fits in with EU budgetary timetabling.
So Ladies and Gentlemen, that was a fairly quick run through a subject that I’m sure our grandchildren in future will study for A Level History!
We have considered how we established what the key Brexit issues are, the issues themselves and BIBA’s positions, the lobbying we have undertaken and finally we have taken a glimpse at the Article 50 negotiations.
There is time for a few questions, so who would like to ask the first one?