Brexit implementation period: common sense versus political negotiations

Out-Law Analysis | 31 Oct 2017 | 4:45 pm | 3 min. read

ANALYSIS: A proposed implementation period following Brexit is firmly on the political radar and would be good news for insurers, but seems unlikely to be agreed in the short term despite insurers needing to consider when to implement their contingency plans.

Last month during a visit to Florence, UK prime minister Theresa May outlined her proposals on how Brexit should be implemented, and on how the UK's future economic partnership with the EU might look.

May said businesses "should only have to plan for one set of changes in the relationship between the UK and the EU" and advocated an 'implementation period' of "around two years" during which she said businesses in both the UK and EU should continue to have "access to one another’s markets … on current terms".

"It is clear that what would be most helpful to people and businesses on both sides, who want this process to be smooth and orderly, is for us to agree the detailed arrangements for this implementation period as early as possible," May said. For no type of business is this more true than for financial services.

A recent white paper the UK government issued even hinted that interim trade arrangements between the UK and EU could apply for more than two years while all the conditions of post-Brexit trade are put in place.

In her speech, May made the point that UK and EU rules and regulations will be aligned at the point of Brexit and that the issue to resolve in Brexit negotiations is simply "what we do when one of us wants to make changes" to those rules in future.

May's speech echoes the comments of Philip Hammond, the UK chancellor, in a letter of response to Nicky Morgan, the chair of the UK parliament's Treasury Select Committee on 20 September which was recently made available to the public. In his letter, Hammond said that "whatever the ultimate outcome of the negotiations, an integral part of delivering our withdrawal will be the negotiation of a time-limited interim period, to provide certainty and avoid a cliff-edge for business and individuals during the transition from current structures to the new relationship".

A transition, or implementation, period might take a form which would allow financial services firms to continue to operate as usual for an agreed period following Brexit. It is possible, for example, that this would include allowing insurers to continue to use their existing passporting rights to sell and service cross-border insurance policies for a certain time beyond the date the UK leaves the EU.

A transition period would not be a full solution. As any transition period would have an expiry date, insurers would still need to look for suitable solutions to continue to service cross-border policies after that expiry date. Nonetheless, insurers with cross-border business, passporting in or out of the UK, would clearly benefit from a longer period to plan and implement changes the needed as well as to be able to take stock of any outcome of UK-EU negotiations.

Brexit negotiations to-date

Even with the proposed direction outlined by May, Brexit negotiations between UK and EU officials appear to be making slow progress, despite Donald Tusk's instruction to start preparation for talks.

UK Brexit minister David Davis has also made comments aimed at reassuring businesses that a transition of some kind will be agreed.

However valuable the certainty that a transition period would provide would be to insurers, without more progress being made towards a firm agreement on the terms of the UK leaving the EU it seems unlikely that any transition period will be agreed early in negotiations. The EU's negotiation position, consistent with EU chief negotiator Michel Barnier's comments, has been that the future relationship of the EU and the UK can only be discussed after the terms of the UK exiting the EU are settled. Although that position may now be softening, the possibility of any transition period is also valuable negotiating leverage for the EU. As with all important issues in negotiations, it may be unrealistic to expect the EU to concede any ground on this point until late in negotiations.

In the meantime, insurers are still coming under pressure from regulators in the UK, and now BaFin in Germany, to set out their plans in the event of a 'hard' Brexit, under which insurers would no longer be able to rely on existing passporting rights.

For the time being, insurers, both in the UK and the wider EU, are left with the decision of when to implement their contingency plans, if they have not already started, and are hoping for greater clarity from the next round of talks.

Tobin Ashby is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.