Insurance Jottings

Lloyd’s commits to paying claims in ‘no deal’ Brexit

Lloyd’s is working on transferring all European Economic Area (EEA) business to Lloyd’s Brussels before the end of 2020 via a Part VII transfer.

 

In the event that the UK leaves the European Union before then with no transition or implementation period, Lloyd’s underwriters will continue to honour their contractual commitments including the payment of valid claims.

 

Lloyd’s expects that this will have the support of all European regulators as it goes to the heart of treating customers fairly. In the event that it does not, Lloyd’s will direct its underwriters, or take such other steps, to ensure that contractual commitments are met in full whilst the transfer is being completed.

 

Lloyd’s approach has the full support of the UK’s Financial Conduct Authority.

 

Lloyd’s Brussels is authorised to write all EEA business from the 1st January 2019.

 

Urgent EU Action Needed to Address Threat of Hard Brexit, Warns Bank of England

The Bank of England ratcheted up the pressure on the European Union to help stave off the threat a no-deal Brexit poses to trillions of pounds of derivative contracts and millions of insurance policies.

 

The EU has made “only limited progress” in mitigating the financial-stability risks of a disorderly Brexit, and the need for action is now “pressing,” the BoE said. The UK regulator has been warning for months that a disorderly Brexit with no transition period could put financial contracts at risk, disrupt clearing and complicate the transfer of crucial data across the Channel.

 

On clearing, urgent EU action is needed to remove legal uncertainty about whether the bloc’s banks could continue to use London clearinghouses after Brexit, the BOE said. UK-based firms such as LCH Ltd, a unit of London Stock Exchange Group Plc, dominate the lucrative business of clearing of euro-denominated interest-rate swaps.

 

While the UK has announced steps to reduce the risks, including a plan to issue temporary licences if needed, the EU has largely insisted that it is up to industry to prepare for the worst. That has started to change in recent weeks, however, as EU regulators talk openly about preparations for the divorce.

 

Clearing Deal

Steven Maijoor, chairman of the European Securities and Markets Authority, said a transitional access deal is needed so continental banks and trading venues are not cut off from London clearinghouses. Daniele Nouy, the European Central Bank’s head of supervision, said the ECB is “ready to help ensure a smooth Brexit — no matter the outcome of the political negotiations.”

 

Absent EU action, EU banks would need to close out or transfer the contracts they have with UK clearinghouses, the BoE said. “This will be costly to EU businesses and could strain capacity in the derivatives market,” it said.

 

That warning was echoed by the International Swaps and Derivatives Association, which said that the “migration” of thousands of contracts would result in higher costs and pose significant operational challenges.

 

Stress Test

For all the risks, on the 9th October, the BoE’s Financial Policy Committee reiterated its judgment that the UK financial system “would be strong enough to serve UK households and businesses through a disorderly, cliff-edge Brexit.”

 

Other key takeaways from the FPC statement:

  • Given the resources needed for banks and regulators to get ready for Brexit, the BoE will delay the start of next year’s stress test to September 2019, with results to be published in June 2020
  • The results of this year’s stress test will be published on the 5th December
  • The committee is concerned by the rapid growth of leveraged lending, including to UK businesses, and will assess any implications for banks in this year’s stress test
  • It maintained the UK countercyclical capital buffer at one percent and will review the rate at its meeting on the 28th

 

EU Watchdogs Step Up Plans to Avert Market Meltdown from No-Deal Brexit

After months listening to the UK warn about the risks posed by a no-deal Brexit, European Union financial regulators are now stepping up plans to avert a market meltdown.

 

Daniele Nouy, the European Central Bank’s head of supervision, set an assuring tone on the 4th October when she said the ECB is “ready to help ensure a smooth Brexit — no matter the outcome of the political negotiations.” And she is not alone. The EU’s top markets cop called on Brussels to guarantee that the bloc’s banks do not lose vital access to London’s clearinghouses in a disorderly divorce.

 

That is a change, because up to now the EU has largely said that preparing for a cliff-edge Brexit, with no transition to give governments and financial firms time to adjust, is the industry’s responsibility.

 

Ms Nouy and Steven Maijoor, chairman of the European Securities and Markets Authority, signalled that EU institutions would take action if needed.

 

Potential Risks

The Brexit talks are entering a crucial phase, with about two weeks of intense negotiations planned to try to wrap up a withdrawal agreement before an summit of political leaders on the 17th October.

 

With the clock ticking down to Britain’s planned withdrawal next March, and both sides talking openly about the negotiations possibly collapsing, calls from the UK and industry to address the risks are growing louder.

 

ECB Governing Council member Ewald Nowotny said the potential risks are still underestimated. “There are many signs that the risk of a hard Brexit will become relevant,” he said.

 

For most of the last year, Bank of England Governor Mark Carney and Financial Conduct Authority Chief Executive Andrew Bailey have urged their EU counterparts to join them in promising regulatory or legislative responses to calm markets and ensure insurance and derivatives contracts can continue uninterrupted.

 

The Bank of England has said that a disorderly Brexit could put as much as 96 trillion pounds (US$125 trillion) of derivatives contracts at risk, along with billions of pounds of insurance liabilities.

 

‘Transitional Provision’

The European Commission, the EU’s executive arm, has so far downplayed the BOE’s alerts, insisting that the onus is on firms to Brexit-proof existing contracts.

 

The commission has said it “stands ready to adapt to the developments in the negotiations” and will review the situation after the October summit

 

Mr Maijoor said this week that EU lawmakers need to adopt a “transitional provision” swiftly which ensures the bloc’s banks do not lose access to a critical cog in world markets — London’s derivatives clearinghouses.

 

In a no-deal Brexit, UK clearinghouses could lose authorisation to do trades for EU clients.

 

The urgency to act was thrown into sharp relief in recent days when European banks were told they need to give notice by the end of December if they intend to close positions at London Stock Exchange Group Plc’s clearinghouse, the world’s biggest for euro-denominated interest-rate swaps.

 

Mr Maijoor also said ESMA would start talks with the FCA to have partnership agreements in place in time for Brexit, so they can continue to exchange information and work together on supervising financial firms.

 

Robert Ophele, head of France’s markets regulator, likewise said EU regulators are committed to establishing cooperation agreements with UK authorities.

 

Mr Bailey said on the 4th October that he was ” encouraged” by Mr Maijoor’s remarks.

 

“We’ve all been very clear that we mustn’t let Brexit cause a sort of breakdown in relations,” he said.