Bermuda’s Brexit Blues?
About Jeremy Leese
Jeremy’s practice focuses on corporate finance, mergers and acquisitions, corporate reorganisations and restructurings, banking and international real estate finance, structured finance, as well as regulatory and legislative compliance.
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Setting aside the effects on the UK economy, which are already being felt with political turmoil, the fall of the pound, billions being slashed from UK stocks worldwide and the potential break-up of the United Kingdom itself, one little examined effect is how its overseas dependent territories, of which Bermuda is one of the largest, would fare in the post-Brexit world, particularly in their relationship with the EU that the UK is leaving behind.
The most keenly felt effect on a personal level may be in relation to individuals and their ability to live and work in Europe. Through the right to a UK passport, Bermudians have the right to work and to live in all European Economic Area countries (all EU member states plus Switzerland, Norway, Iceland and Liechtenstein), with no work permit requirement and the same rights as nationals of those countries in pay, working conditions and benefits. This has helped many Bermudians to pursue careers overseas, particularly in the global insurance industry. Brexit will most likely take this privilege away from Bermudians going forward. Given the probable renewed focus on tightening immigration control by the UK government, it seems unlikely that the UK will allow the free influx of people to continue. Hence the reciprocal right of UK nationals (and Bermudians) to live and work anywhere in the EU will surely end as a consequence.
Turning to effects on the tourism industry, the fall of the pound will make a trip to Bermuda significantly more expensive for British visitors, who made up 7.6 per cent of the island’s air arrivals last year (a small, if important, element of total visitor numbers). For other businesses on an island that imports so much, the other side of the coin is that British imports should become significantly cheaper, which would improve their bottom line.
The most far reaching effects could be found in the international business arena, and most notably the insurance/reinsurance industry. A report published by the UK Overseas Territories Association on the territories’ relationship with the EU stated that Bermuda exported €21.7 billion (about $24.5 billion) worth of services, mostly insurance-related, to the EU in 2014. Many of Bermuda’s commercial insurers and reinsurers have grown into truly global operations, and that export statistic clearly shows how the EU has become a key market for them. Many of those insurers have operations in the Lloyd’s of London market. Lloyd’s insurers have unhindered access to the EU market through a passport system that allows them to trade and to establish branches in other EU member states. This opportunity to sell to a market of around 500 million people inevitably will become less certain after Brexit. UK leaving the EU may impact on London based operations – other re/insurance markets will no doubt seize the chance to impress on the world their own stability, as well as the potential benefits for any London market insurance or reinsurance firms who want to avoid the uncertainty and shift their domicile to somewhere that will not be affected by the UK pulling out of the EU – but what about Bermuda?
Bermuda is certainly well positioned, with a Solvency II equivalent regulatory regime, a well-developed business environment and a swift process to domicile in the market. Bermuda’s position, as a key re/insurance hub for both the United States and Europe could see the jurisdiction benefit from any major fallout for the London market as a result of Brexit. The longer the renegotiation of post-Brexit UK’s relationship with the EU drags on, the greater the uncertainty over London’s continued status as a pre-eminent financial services hub would be. Bermuda may pick up some business that might otherwise have gone to London. As part of this, the island’s insurers could possibly shift some operations from the UK to Ireland or Switzerland to maintain untroubled EU access.
Pro-Leave campaigners argued that the financial services industry could benefit from the UK no longer being subject to the complexities of EU legislation. However, it may well be that the terms of any exit agreement following the Leave vote will also involve the UK retaining the equivalent of various laws which originated from the EU, to persuade the EU of the UK’s equivalence and allow the passporting of certain financial services and products from the UK into Europe to continue.
Although EU regulation is not usually implemented in Bermuda, being outside the EU, one area that the UK’s membership of the EU has made a tangible difference is in foreign policy, including economic and financial sanctions and restrictive measures. As Bermuda is subject to UK sovereignty, the UK has been obliged to implement laws in the jurisdiction which give effect to the EU’s Common Foreign and Security Policy, which includes EU-origin sanctions. Following Brexit, UK foreign policy will, almost certainly over time, start to differ from the EU’s policy, including in the way it deals with countries currently subject to sanctions. This could involve taking a stricter approach than the EU in some areas (the UK has lobbied for tougher sanctions against Russia, for example) and possibly a more relaxed approach in others, which could directly impact on the ability of Bermuda businesses being able to do business across (some) borders.
As a caveat to all of the above, one must note that the biggest problem with predicting how Brexit will impact anyone or anything remains the uncertainty surrounding the terms of the UK’s exit, whether there will be a full Brexit withdrawal, a partial Brexit and accompanying renegotiation, or indeed whether the much discussed Article 50 will be invoked at all in the coming months.
Bermuda must once again prove itself capable of adapting to changing international circumstances and of capitalising on opportunities that arise. There is a tightrope to be carefully walked, a balancing act between Bermuda maintaining its important links with the post-Brexit UK as a British Overseas Dependent Territory and maintaining its hard fought business relationships with, and within, the EU in its own right following the UK’s departure.