The EU Banking industry is stil recovering from the financial crisis with ongoing restructuring work and the UK leaving the EU comes at a challenging time for the sector.
This means that the potential upheavals that could result from Brexit include more challenges for the whole of the banking industry as well as its stakeholders.
Brexit is expected to result in a significant disruption as banks, clients, market infrastructure and regulators simultaneously carry out their plans to prepare for the UK's departure from the EU.
And Brexit transformation programmes are likely to be broad, with myriad activites needing to be delivered. These include restructuring legal entities; designing new ways of operating and transacting; gaining regulatory approvalsl; connecting to new market infrastructure providers - such as exchanges and central clearing facilities who themselves may be undergoing a similar transformation process - moving staff into new premises; and drawing up new contractual arrangements with suppliers.
The impact of Brexit on the insurance sector in the UK and Cyprus
Brexit has caused significant challenges that may impact the future of the sector and in particular how UK market players can continue to service EU markets.
The nature and extent of this impact is unclear at this time. For a sector practised in risk management, reducing this uncertainty is essential. It is up to UK insurers to find the best ways to service their clients and hence continue to grow their businesses. Following Brexit, insurers will need to continue servicing cross border insurance contracts written prior to Brexit. This applies to both EU 27 insurers that passported into the UK (inbound firms) and vice versa (outbound firms).
The UK is an important base for accessing the EU market for non-EU headquartered financial services institutions. These companies are examining how to safeguard this treasured access that enables them to provide services across the 28-member EU market. If the right to passport solutions is withdrawn, UK insurers with European businesses will need to structure their businesses differently. It may also be necessary for insurance companies using third country passporting through the UK to restructure their activities. Another option for UK insurers would potentially be to transform their UK business into a branch of a new EEA company. This would have the benefits of a more efficient capital structure whilst continuing to house operations in the UK.
Cyprus can support UK providers seeking continuity of access to EU markets in selected insurance sectors and also offers valuable options to complement insurers’ international strategies. Cyprus
i) has high levels of insurance expertise;
ii) has a culture of professionalism in financial services, including accountants, lawyers and actuaries whose professional qualifications are derived from UK institutions;
iii) Has a legal framework largely founded on the fundamental principles of the English Common Law;
iv) Has broad use and acceptance of the English language;
v) Has a similar working model in place as the one in place in the UK as it pertains to the liaison between the Superintendent of Insurance and regulated entities;
vi) Solvency II regime fully adopted and in place;
vii) IFRS reporting applying to all insurance companies (as opposed to any ‘’local’’ GAAP)
The result of the UK’s referendum has already led to considerable market turbulence, with Brexit likely to result in a significant upheaval as funds and fund managers start to implement their strategies in preparation for the UK’s departure from the EU. Brexit transformation programmes are likely to be broad with activities ranging from restructuring legal entities and designing new ways of operating. This creates a number of challenges for UK-based fund managers.
Brexit could lead to funds established in the UK becoming automatically “third country” funds and UK-based fund managers “third country” managers, for the purposes of the AIFMD meaning that they may no longer be able to market funds to EU investors based on EU ‘passporting’ arrangements. Fund managers should, therefore, look at other alternatives that will enable them to continue to have access to the EU market. Cyprus could be the domicile of choice for UK fund managers reassessing their business models in light of Brexit. Cyprus can provide practical solutions to ensure they retain their access to the EU market whilst at the same time enabling them to take advantage of significant tax breaks and benefits available to them.
What are the implications for UK businessses providing Investment Services in the EU?
The European Union's vision for a single market in financial services is that entities providing investment management services authorised by their local EU competent authority, may provide investment services in any other member state by establishing a local branch or by providing the services cross-border without the need of a separate authorisation (EU passport).
Assuming that the UK proceeds with leaving the European Union, the UK based firms providing investment management services will not be subject to European regulations (e.g. MiFID II, AIFMD, UCITS) anymore. This means that these entities may potentially loose their passporting rights, revoking their access across the Euopean Union to provide their services.
Businesses based in the UK who currently provide investment management services in the European Union should consider obtaining an authorisation by the Cyprus Securities and Exchange Commission to operate as a Cyprus Investment Firm (CIF), an Alternative Investment Fund Manager (AIFM) or a UCITS Management Company. This will enable these entities to continue doing business with their clients within the European Union after Brexit.