Brexit Take-off

Author: James Camilleri

The UK’s determination to go ahead with its Brexit plans will spell into lengthy negotiation proceedings that are not only time-consuming but also very costly.[1] Meanwhile, the UK’s Prime Minister Theresa May is intent on invoking Article 50 of the Treaty of the European Union (TEU) by the end of March. This article gives a Member State the right to withdraw from the European Union (EU) and was introduced in the Lisbon Treaty. Once Article 50 is invoked, it provides that negotiations are open for two years after which the state’s membership is terminated.

Given that the UK has been a part of the EU for 43 years, there are literally thousands of subjects that need to be discussed.[2] In fact the amount of work is so astounding that keeping up to the two-year deadline will be an achievement. To the UK’s disadvantage is also the fact that this is all ‘uncharted territory’ meaning they cannot rely on past experiences to find their way about.

At the heart of the Brexit deal is the trade aspect that is something the UK cannot deny that it wants to maintain. This puts the UK in an awkward position since on the one hand it wishes to sever ties with the EU but on the other it knows that it cannot afford to lose the income generated with a huge global market as is the EU. Negotiations of a trade nature do not only involve the EU institutions but is a matter pertinent to the other players, meaning the EU Member States.[3] The issue is a sensitive one since the other Member States may feel cheated by the fact that the UK is renouncing to its obligations with the EU but is still able to enjoy the benefits of a single market.

In line with the UK’s parliamentary procedure, a bill, called the European Union (Notification of Withdrawal) Bill, is being discussed in parliament. This Bill permits the Prime Minister to notify the Council of the European Union that the UK is formally triggering Article 50 TEU thus unfolding the negotiations process to withdraw from the European Union. This bill has passed through the House of Commons and is at present being discussed in the House of Lords. The House of Lords has requested changes to be made to the Bill forwarded by the House of Commons, therefore these changes have to be further approved by the House of Commons.[4] In the last turn of developments, the House of Commons has rejected two amendments of the House of Lords which, however, have not insisted to these amendments. Therefore, the Bill is all set for the Royal Assent.[5]

Amongst the salient points of the Brexit debate is that the results of the referendum cannot be ignored but there is also the fact that a large number of people voted to remain in the EU. [6] The country is still so divided on this point that Lord Owen, an Independent Social Democrat, pointed out it is possible to reconsider the UK’s position to leave all through the two-year negotiation process, when technically the UK will continue to be a full member of the EU.[7] On the other hand, Lord Bridges, Minister for the Department for Exiting the European Union, said the Bill should be passed as swiftly as possible allowing negotiations to proceed[8] – this would help to reduce the current state of uncertainty.

As an example, the effects of Brexit on the UK aviation industry would be influenced by the impacts on economic activity and the sterling (GBP) exchange rate. It is estimated that the repercussions will be negative: there will be a slowdown in economic activity and the sterling exchange rate will fall.[9] The weakening of the GBP makes travelling out of the UK more expensive for its residents because less goods and services can be purchased with a given amount of pounds sterling. This works vice versa for people visiting the UK as they will see the purchasing power of their currency vis-a-vis the pound sterling expand, encouraging foreigners to travel to the UK. Ideally, there could be an offsetting effect; however the estimates predict a decrease in air passengers to the UK of between 3-5% by the year 2020.[10]

The UK’s share of international trade is dominated by the European Union. Despite all efforts of the UK government not to lose international trade ties with the EU, it is not realistic to picture a situation where the UK is no longer a member of the EU and still enjoy the same level of trade with the other Member States. Consequently, because of the reliance of UK trade with EU Member States, a reduction in international trade will be inevitable. The Organisation for Economic Co-operation and Development (OECD) estimates a decrease in UK international trade levels of 10-20% by the year 2030.[11] This will negatively impact the UK’s air freight market.

Legislation is a fundamental aspect of the European Union and from an aviation perspective the EU has imposed on the Member States various measures governing issues of consumer protection, safety, security and the environment.[12] This was one of the arguments of the Leave campaigners – to rid the UK of the restraining legal instruments of the EU institutions. However, the UK’s necessity to maintain strong ties with the EU means that it will still be exposed to European aviation legislations. This is in the face of the reduced power of the UK government to participate in the decision-making processes of the EU. A case in point is membership to the European Common Aviation Area (ECAA) which permits access to the Europe’s single market in aviation services – the Single Aviation Market. Membership to the ECAA involves compliance with aviation laws by the EU.

The ECAA is open to non-EU members and, though the UK has for long been a proponent of liberalizing the aviation services market, it would be the simplest way for the UK to have access to the Single Aviation Market.[13] However, this entails having to comply with European Union laws on aviation bringing the UK back to where it started from. To make matters worse, the European Union does not only mean access to the Single Aviation Market but also to other aviation services agreements, notably that with the US, in the EU-US agreement. As a member of the ECAA, the UK could be a party to the EU-US agreement, such as Norway and Iceland have done.[14] On the other hand, the UK may take idea from the EU-US agreement and decide to go for an EU-UK agreement, allowing the UK to compromise its exposure to EU aviation laws. Without going in to the merits of an EU-UK aviation agreement, this could result in higher prices for UK carriers[15] opening the door to new opportunities for non-UK based carries.

Now that the UK government has been given the go-ahead by parliament to continue on the road to Brexit, rumours about a second independence referendum in Scotland are gathering momentum.[16] Nicola Sturgeon, First Minister of Scotland and leader of the Scottish National Party (SNP), has declared she will ask the Scottish Parliament to grant permission for a second referendum, which she wants to be held before Britain exits the European Union, that is, between autumn of 2018 and spring of 2019.[17]

Considering the SNP has a substantial majority in the Scottish Parliament it is easy to picture the scenario of Ms Sturgeon’s request being given the green light. On the contrary, Theresa May is reluctant in allowing the referendum to proceed before the Brexit negotiations are done with, accusing the Scottish First Minister of creating ‘uncertainty and division’.[18] Technically, it is improbable for Mrs May to deny the Scottish people the right to a referendum but she could object to the referendum taking place before Britain has left the EU.[19]

Ms Sturgeon’s argument cannot be brushed aside: Scotland ‘stands at a hugely important crossroads … we didn’t choose to be in this position … the stakes are high’.[20] This means choosing between either leaving the EU or becoming an independent country. It is less than three years since an independence referendum was defeated in Scotland by a vote of 55-45.[21] The EU institutions in Brussels have warned Scotland would have to re-apply to join the EU if it goes ahead with its plans for independence.[22] In contrast to Ms Sturgeon’s expectations of being speedily ushered into EU membership – with other countries waiting for their turn to join the EU, Scotland’s application process could last for years.

The leader of the SNP was not in favour of leaving the single market in what has been termed a ‘hard Brexit’.[23] On the other hand, the economic future of Scotland as an independent country is said to be riddled with difficulties. Top economist Paul Johnson, director of the Institute for Fiscal Studies, cautioned of an ‘economic chaos’ – the country having to choose between raising taxes or cutting spending.[24] He also pointed out Scotland may be cornered into having to adopt the euro to be able to stay in the EU.

Mr Johnson presented the situation that taxes collected per person from Scotland were similar to those collected throughout the UK. However, the rate of spending in Scotland was higher per person than in the rest of the UK. This state of unbalance was compensated by an inflow of money from the UK in favour of Scotland. Severing this inflow would have to be made up for by an increase in taxes.[25]

Author: James Camilleri
Get in touch: | +356 21 493 041




[1] ‘Jean-Claude Juncker: UK faces hefty Brexit bill’ (BBC News, 22 February 2017) <> accessed 8 March 2017.

[2] Ibid.

[3] Ibid.

[4] ‘European Union (Notification of Withdrawal) Bill 2016-17’ (WWW.Parliament.UK) <> accessed 10 March 2017.

[5] Ibid accessed 15 March 2017.

[6] 51.9% voted to leave against 48.1% who voted to remain. (BBC News) <> accessed 8 March 2017.

[7] ‘Lamont: Remainers’ ‘duty’ not to undermine Brexit talks’ (BBC News, 22 February 2017) <> accessed 8 March 2017.

[8] Ibid.

[9] IATA, ‘The impact of ‘BREXIT’ on UK Air Transport’ (2016) <> accessed 10 March 2017.

[10] Ibid.

[11] OECD Publishing, ‘The Economic Consequences of Brexit: A Taxing Decision’ (2016) <> accessed 10 March 2017.

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] ‘Seizing the Brexit opportunity’ (IATA, 13 October 2016) <> accessed 10 March 2017.

[16] Stephen Castle, ‘Parliament Clears Way for ‘Brexit’ Talks as Scottish Vow Independence Vote’ (The New York Times, 13 March 2017) <> accessed 17 March 2017.

[17] Ibid.

[18] ‘Plan for second Scottish referendum ‘deeply regrettable’’ (RTÉ, 13 March 2017) <> accessed 17 March 2017.

[19] Jason Groves and John Stevens, ‘Hands off our Brexit, Nicola! Theresa May to insist new Scottish referendum must be held AFTER Britain leaves the EU’ (Mail Online, 14 March 2017) <> accessed 17 March 2017.

[20] RTÉ (n 18).

[21] Ibid.

[22] Ibid.

[23] Groves and Stevens (n 19).

[24] Ibid.

[25] Ibid.

Brexit – PKF promotes Captives in London

Author: Danielle Hermansen
Published on Malta Today 9th February 2017

What happens in the insurance market following the invoking of Brexit? Will this have any ramifications or changes in domiciles of Captives? So far there are more questions than answers – one will need to look out for unique opportunities but all agree that it is early days to forecast how Brexit can affect UK, Malta and other EU members.

Captive owners and insurers have a maximum of two years from the triggering of Article 50 to formulate any contingency plan, as we know that the Brexit day won’t come before summer 2019. It goes without saying that maintenance of access to European markets, in particular financial services, is a key objective for the UK in its negotiations, although certain EU leaders have already made objections to the UK’s wish to “cherry pick” particular options and benefits. Typically, both UK- and Gibraltar-based insurers are writing risks into other EU territories through the ‘passport’ provision as opposed to having a separate regulated entity in that jurisdiction; or EU based captives and insurers writing UK or Gibraltar risks, without a separate UK regulated and capitalised entity.

Press comments are already beginning to speculate on this, with the likes of companies in Gibraltar, being a dependent territory of the UK, pondering on the possibility of seeking alternative domiciles, although there is no rush as just in case Gibraltar forfeits passporting rights there is a good transitional timeline to allow for proper planning of the situation for affected captive owners. Do not be surprised that Dublin and Luxembourg are rumoured to plan road shows in Europe to catch the flow.

Nonetheless the outcomes are uncertain. Conversely any insurer may after Brexit need an additional licence to conduct insurance business in the UK. The EU captive insurer may need to form a UK branch or a new UK entity, particularly if it is insuring compulsory classes such as employers’ liability and third-party motor liability risks in the UK. An alternative would be to use a UK insurer to front the risk.

One may well ask, apart from Brexit, with so much competition, what can Malta offer which will sets it apart from other centres such as the Isle of Man, Channel Islands, Luxembourg, Dublin and the Caribbean? The answer is: a flexible and fair regulation, a competitive fiscal regime, over 70 double tax agreements, a stable government and quality financial services and unique regimes such as the Protected Cell Company legislations available to Malta. In this context, PKF Malta offers, apart from the core internal and external assurance services, specialised surveys within the local industry.

Being an independent member firm of PKFI, it works closely with international offices to deliver technical solutions to the local insurance industry. Due to continued training of staff in all aspects of insurance, PKF has the ability to give a tailor-made service which goes beyond mere compliance, thus offering a whole range of value enhancing tasks. Typically, one can mention the attendance in 2016 at the SIFMA – Insurance and Risk Linked Securities Conference in New York, having an opportunity to discuss with experts emerging trends – particularly concerning the ILS market.

This sector is becoming more popular and in the process expanding the concertina of new products to cater for a more diverse range of cedents, such as captives. The ILS vehicle provides a means by which the captive may seamlessly transfer its catastrophe risks, other than solely relying on the traditional reinsurers. Granted this market is still in its early stages, yet in the same way the non-traditional use of ILS is gathering popularity to provide capacity for embryonic cat risks, such as cyber risk and operational risk.

It is evident that opportunities for growth in the US market are opportune for Malta as an EU jurisdiction. The harvest is ripe for those who venture forth. It is pertinent to note how last year with the support of FinanceMalta, PKF participated in two promotional events in New York.

Both events aimed to promote Malta as a domicile of choice.  Questions covered topics such as migration, what does it entail, how to survive Fatca and CRS, what should investors look out for and finally what are the advantages in a European domicile. All events were well patronized and attracted a gathering of insurance consultants, risk managers and legal advisers in the field.

It served as a catalyst to place Malta on the radar screen whenever insurance managers are asked where to domicile in Europe in the shadow of Brexit. The event attracted interest from large captive managers the likes of AON, JLT Marsh and R&Q. In attendance were industry service providers providing technology solutions the likes of Verisk Insurance Solutions, Intralinks and Rante, apart from legal firms, investment managers, banking executives from Wells Fargo and Barclays, rating agencies and heads of state regulation in Delaware.  A common question from participants was about regulatory and fiscal barriers for US companies wanting to host risks in their European vehicles.

A tax expert from the PKF New York office explained in simple terms what migration entails, how to survive Fatca and CRS – essentially what risk managers should look out for. The momentum generated by the US shows encouraged us to continue in our efforts in 2017, hence attending the Captive Owners Summit this week in London.

The Summit is strictly by invitation to a select group of captive owners.  Delegates to the event can benefit from the opportunity to meet and share experiences with other insurance buyers, and learn more about how they are tackling the challenges of delivering value and innovation for their captives. The 2017 event will take place on 9 February at the Clothworker’s Hall, London. Unlike other captive owner events, the Captive Review Summit is a smaller, more intimate forum, where delegates can benefit from a highly bespoke programme of roundtables, networking and educational sessions, all carefully curated to meet their specific needs and interests.

Each roundtable is led by an experienced captive owner, alongside a respected consultant. Talking of networking, it is opportune to recall how 2016 saw the fruit of the labours by the EU Commission to introduce complex Solvency II rules. This was a milestone regulation which took a decade in the making and ventured new concepts such as Pillar I, FLAOR (Forward Looking Assessment of Own Risks), Pillar II, Pillar III, management and personnel, costs incurred to implement new software as well as the perception of the insurers in view of the regulator.

The regulation covered all insurance licensed firms including Insurance Principals (Insurers and Reinsurers), Captives and Protected Cell Companies (PCC). One augurs that the risk-based approach of Solvency II will continue to evolve and serve as a catalyst for risk managers overseeing that capital and the value allocation thereof is properly aligned to underwriting criteria.

Back to Brexit one may conclude by quoting data from Financial Conduct Authority in the UK which plainly illustrate the scale of the potential problem as it reveals 5,476 UK-registered firms which hold at least one passport to do business in another EU or European Economic Area member state. With A.M. Best warning that the removal of passporting rights of the UK following Brexit will have a weighting on UK insurers, with new setups in Europe coming at a cost, with £7.3 billion of premiums currently written in London which may be directly affected by a change in rules. This is apart from just over 8,000 companies authorised in other EU states to use these rules to do business in the UK – this is a double-edged sword. The future after Brexit for risk managers in UK may pose unprecedented challenges.

pkf malta, pkf, financial services, maltaAuthor: Danielle Hermansen
Published on Malta Today 9th February 2017
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