April 26, 2017
A search for the phrase “hard Brexit” in Google returns more than 40 million results – not bad for an expression that is less than a year old. As formal negotiations now begin on the future relationship between the UK and the EU, it is clear that we must be prepared for a wide range of possibilities, and that the impact on our clients and partners may be unexpected and wide-ranging.
As we will explain, life assurance and capital redemption policies are likely to remain an important solution for high net worth Individuals resident in the UK – and indeed, the consequences of Brexit could make them even more relevant. However, the distribution model involving intermediaries who use passporting rights to sell into or out of the UK on a cross-border basis could be under threat.
Update
On 29 March, the UK served notice to the European Council of its intention to withdraw from the EU under Article 50 of the Lisbon Treaty. That started the clock on a two-year period for negotiation of the terms of withdrawal, which means the UK should be leaving the EU in 2019.
In addition, a UK general election has been called, due to take place on 8 June this year. A key election issue will be about controlling immigration and ending the free movement of people. As this is one of the ‘four freedoms’ guaranteed by the European single market – the other three being free movement of goods, capital and services – it would also mean the UK quitting the single market.
The current ruling party, the Conservative Party, has indicated its intention to do exactly this. According to polls, they are expected to win the election convincingly, which would strengthen their position to negotiate Brexit as they see fit. In other words, we are probably moving away from a soft Brexit toward more of a hard Brexit.
How will this impact the life assurance industry, and in particular OneLife, its clients and partners? At the moment, it’s business as usual, since the UK is still a full (paying) member of the EU, but what about when it leaves in 2019?
Contract stability
All benefits that clients derive from life assurance products are likely to be maintained. For example, the UK taxation rules for life policies have nothing to do with the location of the insurer (apart from some additional benefits for insurers not based in the UK). In other words, the relationship between the UK and the EU has no impact on the tax treatment of policies.
Furthermore, the products are valid contracts, governed by the law of England and Wales. They have been written to meet the requirements of local legislation, and have been signed off as such by an external UK-based law firm. Brexit will not change UK contract law, so the contracts will still be valid.
There may be some minor changes in prospect – for instance, where there are references to the EU – and OneLife will closely monitor this over the next two years to ensure full compliance. Otherwise life assurance is set to continue to enjoy the same legal framework as before Brexit.
A greater need
At OneLife, we appreciate that Brexit could have significant consequences for many wealthy individuals resident in the UK, and in some ways could intensify some of the trends already visible in the world today.
First, there are question marks about the overall impact on the UK economy. Most commentators agree that there will be a slowdown. Already in 2017, the UK’s forecast growth has been halved from 2% to 1% by the IMF, OECD and the European Commission, and sterling has dropped dramatically since the referendum was held. Against this background, we can expect the government to maintain relatively high rates of tax for individuals.
In a worst-case scenario, there is the possibility of a recession, which would prompt clients’ concern about the security of their investments.
Secondly, more individuals might look to leave the UK if it becomes a less financially attractive destination. The UK employment market already shows signs of change, as companies take precautions to ensure continued access to the single market. In particular, the financial sector is making headlines as institutions formulate plans to open subsidiaries across Europe.
Wealthy individuals and their advisers need to consider these issues as part of their overall wealth planning strategy. A carefully constructed life assurance or capital redemption policy is a popular and well-established solution as part of a diversified portfolio.
While various governments, including that of the UK, are increasingly challenging aggressive tax planning, life products generally continue to enjoy public support as long-term investment vehicles. Investments held in the policy can grow free of capital gains tax, and income tax can be deferred years into the future. Moreover, when used with an appropriate trust solution, life products can be effective succession planning tools.
Our two UK products meet these needs. In addition, they offer a broad range of investment options and the flexibility to meet most client needs, while being fully compliant. Our trust solutions, backed by in-house expertise, also represent a wide range of options to underpin effective succession planning.
For clients for whom a move abroad may be on the cards, our life assurance product is extremely portable. The requirements vary by country, but for many jurisdictions, we are able to adapt the policy to be fully compliant in the new country of residence. Meanwhile, the capital redemption policy removes the need for a life insured, which can ease the administrative hassle for trusts in particular.
Finally, the famously robust Luxembourg policyholder protection regime will give clients peace of mind in more unsettled times.
Passporting
Under the EU’s freedom of services principle, many intermediaries benefit from passporting. Once they are authorised in one member state, they may provide services in other member states without need for a separate licence or establishment. For the UK, this model is now under threat. Despite the political pressures, a solution may still be found, but as Bank of England Governor Mark Carney advised recently, it is better to be prepared for all outcomes.
For many wealthy individuals, entrepreneurs and financial advisers, it will be an unsettling time. Perhaps worthy of their consideration is that some UK businesses are already moving or creating a presence in Europe to cover all eventualities. Like most aspects of wealth planning the old rule of “the sooner, the better” may be true now more than ever.
To learn more about possible responses to the challenges that Brexit may raise, please contact our UK expert: paul.pugh@onelife.com
Paul Pugh
Article by Steven Cooney – The content of this newsletter is governed by the limitations and legal notice of OneLife’s website.
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