The head of Brexit preparations for the UK financial regulator has warned that banks and investment firms will still face three “cliff edge” risks if the transition period for leaving the EU expires in seven weeks.
At the City & Financial summit on Thursday on post-transition regulation, Nausicaa Delfas, Executive Director of International for the Financial Conduct Authority, said there were problems with trading derivatives, transferring personal data and offering services to customers in the EU January continue to be a real possibility 1.
“We shouldn’t assume that even if a deal is struck, the outstanding risks in financial services will be mitigated,” she said.
The first two of these threats could still be addressed through a last-minute deal with the EU, she said
Earlier this week, Chancellor Rishi Sunak announced that from January the government would recognize many areas of EU financial regulation as sufficiently strict that correspond to British standards. This process is known as equivalence.
This will allow UK-based banks and fund managers to continue to have access to EU exchanges, benchmarks and services. He said the UK was “acting unilaterally to clarify”.
Brussels has held back and asked the UK for further clarification on whether it will deviate too far from European standards. EU institutions will only have access to UK markets if this is “in the EU’s interest”.
Without a mutual approach, Ms. Delfas admitted that brokers and fund managers could suffer.
“In the absence of mutual equivalence, some companies will face a conflict between the EU and the UK’s derivatives trading obligations, which may affect their ability to trade derivatives at their own discretion,” she said.
In practice, some EU bank branches in London would not know what rules for derivative counterparties to adhere to – creating uncertainty and potential trading disruption.
A disagreement on data could also mean disruption to the operations of the UK financial groups, Ms. Delfas said. Although the UK government has legislated to allow UK companies to legally send personal data to the EU, Brussels has not yet completed its assessment of UK data protection. As a result, Ms. Delfas advises the FCA that financial services companies need new contractual clauses to ensure that data can flow from the EU to the UK.
Local arrangements that allow UK banks to provide services to EU-based clients will also be needed, Ms. Delfas said, as this regulatory requirement “cannot be resolved through mutual equivalence”.
Some countries in the bloc had taken temporary measures when a “no-deal” Brexit was first discussed – but Ms. Delfas warned that many of them have since become obsolete.
UK banks that have not yet taken precautions will have to comply with local laws by January 1st as there is insufficient time to allow EU residents the required two months to terminate their services.
Lawyers said most post-Brexit risks would hurt EU banks and fund managers more than UK counterparts.
“Most of the major UK firms have planned to avoid these cliffs by setting up in the EU after Brexit and setting the right terms for customer contracts,” said Simon Morris, financial services partner at law firm CMS.
“The real obstacle is more of a barrier reef in the English Channel, as EU customers will lose if they are denied access to Europe’s largest capital market,” he said.