Rebalancing the economy away from financial services and our capital city has been the preoccupation of successive governments since 2008’s financial crisis.
The sheer size of the banking sector, so the thinking went, alongside the absence of any second, truly global city beyond London, had made the UK too reliant upon the dominant industry of our great metropolis. Nonetheless, for all the talk of rebalancing, London still generates a quarter of the UK’s GDP and in 2014-15 the UK financial sector contributed 11 per cent of total tax receipts.
The frenzy of speculation over the City’s future in the post-Brexit era, alongside the emergence of rapidly developing fintech challengers, has thrown into further doubt the long-term sustainability of relying upon banking in its current form. But we should not forget that banking is only one of the important industries in the Square Mile. We also have a thriving professional services sector, an emerging tech scene and a highly successful insurance industry. Insofar as we rebalance, we can do so as much within the City as beyond it.
The London insurance market is the largest centre for underwriting commercial and specialty risk in the world – bigger than all its nearest rivals combined. It has clients in over 200 territories, employs over 48,000 people in the UK and is one of the primary contributors to London’s reputation as the world’s preeminent financial centre. There is no doubt that the insurance industry stands to be affected by our exit from the European Union, but there will also be tremendous opportunities to exploit if this industry is free to expand further into the world’s growth markets.
In the immediate future, insurance firms and their customers seek certainty over the legal regime under which they will be operating, and there is an understandable clamour from the industry for clarity as soon as possible on the likely form of our relationship with the EU. The longer this takes to achieve, firms tell me, the greater the risk that they will be compelled to move operations to other EU states to reassure buyers that claims will be paid in the event of loss.
Most of the insurers I have spoken to seek continued access to the Single Market and retained passporting arrangements such that UK and EEA headquartered firms can operate under a single licence, remain subject to Home State prudential supervision, and do not have to set up subsidiary companies in each of the other 30 EEA nations. Finding a way to make this compatible with public expectations on the curbing of free movement will be one of the trickiest aspects of negotiation once Article 50 is triggered, and may require a bespoke deal of the kind that we have not yet seen with the EU. Given that major EU-level regulatory drives such as Solvency II have been sewn into our own law, this could entail being granted “equivalence” in our regulatory status.
We ought not to forget, however, that 80 per cent of the insurance industry’s business comes from beyond the EU’s borders, and there are plenty of opportunities to drive new trade with those nations whose economies are maturing but where there remains significant underinsurance. Insurers would like to see government accelerate discussions with target market countries and work to remove barriers that currently restrict London-based insurers and reinsurers from operating in those key markets as part of future trade negotiations.
We also now have a chance to reinvigorate the regulatory regime. London insurers face the stiffest competition from Bermuda, Singapore, Dubai and Switzerland. In these jurisdictions, regulators are actively promoting their local insurance markets, and London now requires the same support. As things stand, neither the Financial Conduct Authority (FCA) nor the Prudential Regulation Authority (PRA) are mandated to make such market interventions and do not even have to consider the impact of their actions on the competitiveness of the financial sector.
It is rare for an industry to want regulators to be more involved in its work, not less. But there is an opportunity for regulators to review the cumulative impact of regulation to ensure it is not damaging London’s insurance market and to play a more proactive role in its growth. Insurers would now like government to give the PRA and FCA a balancing statutory objective to consider the international competitiveness of UK financial markets and create a dedicated inward investment unit in the PRA to support and encourage new entrants to the UK.
There is growing resistance to the idea that post-Brexit Britain should attract future business by engaging in a regulatory race to the bottom. Insurance offers us an opportunity to place the Square Mile’s other industries on an equal footing to finance in terms of regulatory and political attention, rebalancing the City towards its broader strengths in a way that does not lead to the diminution of our financial services sector or a loosening of standards.
London is the global centre of insurance excellence, with a high concentration of intellectual capital fostered by the colocation of insurers, brokers and support services. In a post-EU world, there is a chance for new products to be designed that address evolving customer demand in an accessible, cost-effective environment. If we can secure a form of continued market access to the EU at the same time as instilling a new focus in our regulators that levels the playing field with our fiercest non-EU competitors, insurance can make an even more robust contribution to our economy.