By Shayne Halfpenny-Ray
Equivalence is an often discussed and at times overestimated outcome for the UK/EU negotiations, particularly in the space of financial services. Its not inevitable, its likely not to happen, and there are huge chunks of financial services unlikely either to be equivalent or have a mechanism to ever seek such a vaunted goal.
I could of course end this killjoy blog here and move on to stamping on a party balloon or snatch some candy out of my infant daughter’s hand. What might surprise you then is I am a believer in equivalence for some parts of financial services. Specifically, for an area I do claim to know a little about, the insurance sector.
The political sensitives of the current UK-EU negotiations against a backdrop of suspected vaccine nationalism aside, the UK’s own work to set out areas of equivalence was a welcome sight to see. Especially after the tit-for-tat exchanges we became used to during the last 5 years/decades/centuries, (however long it truly was). This identified 22 areas of equivalence and set out the framework of how the UK would approach equivalence, and act with or without agreement with the EU (which it has done in most cases).
Fast forward to a few months later, following the successful conclusion of the Memorandum of Understanding (MoU) between the UK and the EU, the case for some formal equivalence agreement can still be made.
The MoU is the first step on our path to a full trade agreement on financial services with the EU but does little than create a cross-regulatory forum. However, what it does is signal a continued commitment to pursuing beneficial trade and to find a path forward which works for both the UK and the EU’s members states. Within the context of our present global circumstances, it’s better than nothing. It also provides a forum for regulatory alignment discussions and enhances the case for equivalency (in some areas of course).
So, what does equivalence for insurance look like? Well one area we can certainly see working quite well is Solvency II. Whilst our market is looking at rule tweaks which would better suit the UK post-Brexit and according to the ABI/KPMG unlock up to a £100 billion in investible capital for a sustainable future, EIOPA is undertaking its own review process, which means we may not find ourselves in entirely different regulatory endpoints.
The other point, and perhaps the most important part of any regulatory alignment or shared vision, is we need to find a way to flip the definition of equivalence on its head. Currently the expectation is the inputs, the rules are set to govern/regulate activity need to be the same or similar for equivalence to be given by sovereign parties. But I think as we shift to a new regulatory paradigm, both in terms of our exit from the EU, but also in modernising our regulatory frameworks to better suit the 21st century, we need to focus on positive outcomes, both for the market and for customers.
The FCA has long talked about the need to become an outcome focused regulator, and my experience in the energy sector and the actions taken by Ofgem and the ONR mirror this prioritisation. So, it should not be an insurmountable task to deliver, but to avoid the cake and eat it accusations could come from flirting with the idea of divergence and equivalence, it is by no means easy. We have already seen divergence reported in financial market regulation, with Britain announcing tweaks to the rules surrounding equity, fixed income and commodities.
I also need to point out not all parts of the insurance market can seek equivalence, let alone want it. Insurance brokers who play a key role in insurance transactions, both domestically and internationally do not have the same capacity to seek equivalence as there are no mechanisms to seek it under the EU’s Insurance Distribution Directive or its predecessor for that matter.
We need to be realistic about our goals and what we can achieve, using the relationships we build through the MoU and those maintained from before the UK’s exit. If successful we can maximise the potential of collaboration and even alignment in some cases, but also realise the benefits of divergence as well. So, to answer the exam question, my politician’s response is equivalence is neither inevitable or unobtainable but requires delicate and committed work from both the UK and the EU. However, the current diplomatic tensions between the two parties may give us an entirely different answer in coming months.
Labour needs to ensure it actively engages with these discussions with the nuance they deserve and with a will to understand the unique needs of different parts of financial services, not just take it as one homogenous sector of the economy. The innovative marketplaces in which we work, that drive economic growth and societal change, cannot continue to be taken for granted, or treated as the ill-favoured cousin to manufacturing, construction, engineering (to name but a few) but as an equal in our diverse economy.
The question around equivalence, can give the party the right opportunity to be more engaged on the Brexit issue, whilst avoiding the political hazards of discussions around re-join or the leader’s past policy stances.
Shayne is public affairs manager at the Chartered Insurance Institute and a committee member of Labour in the City. He is writing in a personal capacity.