The inauguration of Donald Trump as 45th President of the United States on Capitol Hill was a spectacular event - one that is expected to heighten political risk and change global trade relations. Some predict that his presidency will be defined by volatility in global trade and US policy-making, particularly with China and Russia.
His political victory will give momentum to populist movements opposed to trade and immigration and favour protectionism. Populist governments may face instability because of this new measure of protectionism and predisposition to erratic policymaking, which can undermine investors' trust in global trade. One may recall Trump's electoral promises to enforce trade rules, build a wall on the border with Mexico, introduce a tax cut for the rich and possibly impose new tariffs on specific imports that may cause retaliatory action from both Mexico and China. One hopes that, during his term, advisers will usher in an element of moderation, as unfettered protectionism may trigger a trade war.
Coupled with this instability one also fears how negotiations with Britain following Brexit will pan out. The UK wants to fashion a preferential trade deal away from the Single Market and this may lead to friction with the remaining 27 members of the EU. This year we may witness volatility in business until the proposed partnership that the UK wants with the EU is formalised and the full picture of any radical changes can be assessed. Maplecraft (a consultancy) predicts that European markets face a 28 per cent chance of a decrease in stability whereas, as can be expected, British politics is likely to remain unsettled due to the persistent and deep changes resulting from a clean break with the Single Market as announced by Prime Minister Theresa May this week.
The invocation of Article 50 at the end of March will fire the starting gun for tough negotiations with the Commission to release Britain following its 43 years as a full member of the EU. Britain wants to become a global trader away from the Single Market club and explore new trade opportunities with all other continents. Theresa May announced that Britain looks for an ambitious free trade partnership with the EU. This would not involve participation in the Single Market although so far there is a general lack of details on how Brexit talks will evolve. There is the insistence to end adjudication by the European Court of Justice and discontinue contributions of 'huge sums' to the EU. This talk is the opening salvo for a 'clean' Brexit which is set to be harder and perhaps happen faster than many have expected, increasing the risk of more disruption to the British economy and to financial flows to the EU.
This is a bold and ambitious task as, really and truly, Britain is seeking to make up what it will lose from the Single Market by signing new global trade deals. Due to the prevailing uncertainty some companies, particularly those London's financial services sector, are starting to look for alternative solutions. These companies, including insurance and banking, hope the sector will somehow be ring-fenced from the overall negotiations and freedom of services will be retained, but this cannot be left to chance.
It is predicted that the regulated financial services sector could see a particular influx of companies and institutions moving operations from Britain to Ireland or Malta in order to maintain a foothold in the EU markets. In the event of a full Brexit, regulated financial services firms based in the UK would lose their passporting rights to carry on business in any other state in the EEA without obtaining an authorisation or registration on a country-by-country basis.
Naturally, in the Funds sector, asset managers fear they will no longer be able sell UK-regulated funds to the EU. As might be expected, once outside the Single Market, higher non-tariff barriers (NTB) on both goods and services will have a noticeable impact on international trade. With the UK no longer part of the Single Market, in the worst case scenario goods NTBs will cost 0.47 per cent of its GDP and 0.15 per cent of services. Under a new UK-EU agreement, it is worth noting that access to services cannot be guaranteed. Due to the close historical ties that Malta enjoys with Britain, there is a growing sense of interest among UK insurers seeking a safe haven in Malta as an option to accessing the European Union via freedom of services post Brexit.
A report in the media states that the Malta Financial Services Authority recently organised a briefing in London attended by over 100 insurers who asked questions on how the island regulates the industry and what other professional facilities are available. Speaking at the UK Treasury Select Committee on European Insurance Regulation, Phil Smart, head of insurance at KPMG UK, said: "However the Brexit negotiations turn out, UK insurers need to retain an ability to operate in Europe and maintain regulatory equivalence."
Credit rating agency AM Best warned that there are more challenges ahead for the European captive industry. These include the Organisation of Economic Cooperation and Development's action plan on base erosion and profit shifting aimed at tackling tax arbitrage, and the need for contingency plans due to Brexit. Furthermore, Praveen Sharma, representing Marsh (a global leader in insurance regulatory and tax practice) said that Malta offers a credible option for both UK and international insurers that need access to the EU market. It is encouraging to note that Lloyd's of London has shown preliminary interest in opening a subsidiary in Malta within the EU following the landmark speech given by UK Prime Minister Theresa May in which she laid out her government's strategy for Brexit negotiations.
For the past decade, PKF Malta has also been actively promoting Malta as a centre for Captives and has attended conferences and workshops in Dublin, Luxembourg, London, Toronto and New York. Malta has created an innovative range of tools to facilitate the incorporation of captive insurance companies, protected cell companies, incorporated cell companies and, more recently, reinsurance special purpose vehicles. During such promotional events, representatives of PKF Malta met with a number of insurers from, for example, the United States that want to set up operations in Europe due to the onset of Solvency 11 - even before Brexit was on the horizon. There are Canadian insurers based in the Caribbean, for example, that would like to use the unique double-taxation agreement with Malta and establish a branch office.
Others in New York, following Trump's unique style of protectionism, may also see Malta as an attractive option. Not only does Malta offer a robust and flexible regulatory system, but also the business language used is English and the island has all the required support services and infrastructure with an approachable single regulator that is open for business. To top it all, Malta now holds the rotating EU presidency which means that it will be deeply involved in the negotiations with the UK on the terms of its exit from the union. The tiny island that welcomed Admiral Lord Nelson many years ago and became part of the British Empire is now helping its ex-coloniser reach an equitable partnership deal with Europe.
George Mangion can be contacted at [email protected] or on 2149 3041