In our monthly column that is guest written by one of the national funds associations or industry lobby groups, Benoit Lallemand, secretary general of Brussels-based Finance Watch, argues that protecting the citizens of Europe from the consequences of another financial crisis should be a priority.
One of the key points that should be at the forefront of the debate around the UK exit from the EU is the need to continue to better enforce and improve the EU financial legislative framework that has been jointly built.
Neither the UK nor EU financial services companies should seek to use the UK withdrawal from the EU to create regulatory loopholes.
A general collective focus of both EU member states and the UK must remain improving and building a financial legislative framework that can protect citizens from the consequences of another financial crisis. The financial services industry must work instead on properly preparing for a ‘hard’ Brexit scenario to ensure contract continuity.
An issue that has already come to light is the potential to create regulatory loopholes in the registration of third-country branches or subsidiaries of financial services companies. This will be one of the solutions that many insurance companies will likely opt for to prepare for a ‘hard’ Brexit scenario.
It may include attempting to set up a ‘brass plate’ company, which is used to sell services without actually being a properly staffed and functioning operation. Reinsurance could then potentially be used in the case of these ‘brass plate’ companies to relocate capital back to the UK or vice versa. National supervisory authorities should not be tempted to soften their authorisation processes to allow these practices to take place, despite the possible incentives of high tax returns and jobs.
The European Insurance and Occupational Pensions Authority has already issued an opinion calling for consistency in authorisation processes for the relocation of insurance undertakings from the UK. The European Securities and Markets Authority has also specifically denounced outsourcing and delegation that could lead to regulatory arbitrage.
According to the European Supervisory Authorities (ESAs), the overall investment exposure of European Economic Area insurers to the UK is only around 2.13% of the total premiums written.
reHowever, individual companies might be more exposed to UK assets and could be affected by a drop in the value of some asset classes in the short and medium term. The extent of this impact is difficult to predict.
However, the ESAs believe that UK households and corporates could end up with less access to finance in the short term. Combined with possible portfolio transfers, restructuring and effects on market confidence, this could impact market liquidity and risk premiums.
There are a number of areas that need to be closely monitored by authorities at all levels to ensure that Brexit does not have a serious negative impact on financial services and ultimately citizens. The current EU financial regulation framework is by no means perfect and needs to continue to be developed.
This will involve a coordinated effort and a consistent approach from authorities, especially in the case of the risk posed by a ‘hard’ Brexit.
However, a large burden of trust also rests on the shoulders of financial institutions to properly prepare and ensure that consumers are not negatively impacted.
Ten years after the financial crisis, we have not seen the changes in the behaviour of financial institutions that are needed to earn citizens’ trust.
This is another test where they risk further damaging this trust if they try to profit from undermining the regulatory framework.
This column was first published in the June edition of Funds Europe
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