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London's Lloyds Wants Brexit Clarity

John Frederick Nelson is the Chairman of Lloyd's of London. Nelson is a chartered accountant. Photographed in the Lloyds Building. © Charlie Forgham-Bailey
John Nelson, the Chairman of Lloyd's of London, wants clarity from the British government on the Brexit roadmap.
  • Why it matters

    Why it matters

    If Britain were to lose the “passporting rights” that allow London-based banks to provide financial services anywhere in the E.U., Lloyd’s and other British finance companies could set up subsidiaries on the continent or move operations there.

  • Facts

    Facts

    • British Prime Minister Theresa May recently announced that the United Kingdom would formally submit its application to withdraw from the European Union in March.
    • Insurance giant Lloyd’s of London obtained 11 percent of its revenue in the E.U. last year.
    • John Nelson intends to leave his position as the chairman of Lloyd’s in May next year and is not involved in the ongoing search for a successor.
  • Audio

    Audio

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For risk-averse business people, these are not the best of times.

But neither the heightened terror threat in the heart of Europe, nor the various volatile political situations around the globe, seem to unnerve the chairman of the insurance giant Lloyd’s of London.

John Nelson readily acknowledges that the world has become more unpredictable. It’s proven challenging for the insurance sector too. For him, however, these developments also demonstrate how essential insurers are to the economy. They play a key role as “shock absorbers” in times of uncertainty, the chairman told Handelsblatt.

But there’s one element of uncertainty that does seem to get under Mr. Nelson’s skin more than others – the British government’s handling of Brexit.

The 69-year-old banker, who has been at the helm of Lloyd’s for five years, called for greater clarity from London about its plan to pull Britain out of the European Union.

The government needs to provide the insurance industry and wider financial sector with greater security about the next steps in its Brexit road map, he said.

A crucial question for British financial institutions is whether or not they will lose their so-called “passporting” rights, which allows them to conduct business in the European Union from London.

Three-and-a-half months after a majority of the British electorate voted to leave the European Union, there is little tangible information on when the U.K. will leave the 28-state bloc – and more crucially, on what terms.

British Prime Minister Theresa May recently announced that the United Kingdom would formally submit its application to withdraw from the European Union in March. Brexit would then become effective within two years after that date.

But the British government has provided little detail on exactly how it plans to untangle the country, an E.U. member since 1973, from the rest of the bloc, and tough negotiations with Brussels are looming ahead.

For British financial institutions, a crucial question is whether or not they will lose their so-called “passporting” rights, which allow them to conduct business in the European Union from London because Britain is an E.U. member.

Whether Britain gets to keep its passporting rights after Brexit will depend on the negotiations between London and Brussels. Like many financial firms, Mr. Nelson warned that the loss of these rights will have consequences for Britain’s capital city.

“If we cannot safeguard our passporting rights, we will certainly establish a hub on the continent, probably in the shape of a subsidiary,” Mr. Nelson clarified, adding that Lloyd’s would manage its E.U. business through this new company.

Mr. Nelson said Lloyd’s collected 11 percent of its premiums in the European Union last year. While not all of this revenue would be directly affected by Brexit, the insurer wouldn’t like to give up that source of income altogether.

Lloyd’s publicly opposed a British withdrawal from the European Union in the run-up to the national referendum last June, warning that at least 34,000 jobs could be at risk in the insurance industry if the U.K. voted to leave.

Last month, Mr. Nelson suggested Lloyd’s would invoke its contingency plans and relocate an unspecified amount of its business from London.

But it’s not just Brexit that is putting the insurance industry under tremendous pressure. Insurers are having to contend with plummeting premiums and falling yields – challenges that are endangering the profitability of many in the sector.

“I wouldn’t be surprised if we saw consolidation in the coming years. Actually, I’d say this is highly likely,” Mr. Nelson said.

To compound these difficulties, interest rates, which have remained at record lows for several years, are attracting investors like hedge funds or private equity companies into the traditional reinsurance market.

It’s why the Lloyd’s chairman has a simple, albeit unlikely, request. It would be extremely helpful if central banks began to raise interest rates, he said. “This will happen for sure at some point. But honestly, I do not see any sign of this happening in Europe in the short term,” he said.

Mr. Nelson, who intends to leave his position in May next year, is highly critical of the ECB’s monetary policy.

“I am no economist, but I believe there is a time when extending the gigantic bond-buying policy does not bring any results any more – and we are getting there,” he said, accusing the central banks of destabilizing the system and even of provoking a possible recession in the coming years.

For Mr. Nelson, the sooner Europe can raise interest rates to a higher level, the better.

 

Carsten Herz leads Handelsblatt’s asset management and insurance coverage and is based in Frankfurt. To contact the author: herz@handelsblatt.com

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