Brexit in Financial Services - a new type of challenge
20 April 2017
By Nick Forrest
Prior to the notification of the UK’s intention to exit the European Union, planning for Brexit in the financial services industry was about impact analysis, scenario planning and evaluating options. Now Article 50 has been triggered, this changes.
In this suite of 3 articles, we will explore the challenge of Brexit, then the timescale required for implementing Brexit and lastly the pragmatism necessary to avoid major market disruption.
The two years to March 2019 will be a period of substantial change, as financial services firms prepare to maintain client service in a post-Brexit market environment. There will be a unique combination of factors not seen before in financial services:
- Financial service firms have to plan for all Brexit outcomes. Despite positive messages from UK and EU in regards to striking a deal that works for all, firms should prepare for the outcome that the current market access arrangement will not continue as before. This is important because, should a hard Brexit scenario unfold, they would be at risk of regulatory breach and significant business disruption. Two years is a compressed time frame with a hard stop for any substantial transformation programme.
- Financial service firms will have to manage the uncertainty which will continue throughout the withdrawal process. There is no clear set of future arrangements which firms can plan towards, nor do we expect clarity early in the exit negotiation period. Firms have to reduce risk and the impact of uncertainty by sticking to a plan which covers the whole range of potential outcomes.
- All market participants will be making substantial changes simultaneously. While providers of market infrastructure, such as clearers and exchanges need to establish how they will adapt to Brexit, EU regulators will be dealing with an elevated quantity of licence applications and modifications and UK regulators will have to transcribe EU regulations into UK regulations. Furthermore, banks customers, such as non-financial corporates are examining the impact of tariff and trade barriers on their business models. This amount of change will require increased communication between financial services firms, their regulators, customers and suppliers.
Bank transformation programmes are complex, lengthy and resource-intensive. The complex nature of products and services provided, the need to make granular changes to technology coding and the heavily regulated environment all affect client interactions. Whereas some (non-Brexit) transformation programmes involve merely a subset of products or processes, adapting to Brexit potentially requires a wide range of interacting transformation activities. In our report for Association for Financial Markets in Europe (AFME)(Operational impacts on wholesale banking and capital markets in Europe) we examined 25 different workstreams in detail which will be required in a typical Brexit programme for a wholesale bank. Our report brings out the breadth and complexity of such Brexit programmes.
Given these challenges and the Prudential Regulation Authority’s (PRA) letter requesting that Financial services firms undertaking cross-border business between the UK and the EU-27 provide details of their firm's Brexit contingency planning by the 14th July 2017, financial services firms have no time to lose. From April 2017, firms will make their final jurisdictional choices about where to locate new subsidiaries. Shortly after, legal entity and operating model design work needs to be completed, so that any regulatory applications can be made. These applications should take around six months, but can take over a year. Working backwards from March 2019 (and allowing some time for testing) can help firms determine when they need to start the complex task of contracting existing customers with these new subsidiaries and the pace of building up the necessary infrastructure and staffing levels in these new locations. Any firm needing to change customer contracts to the newly located entity will need to start this well before the end of 2017….which happens to coincide with the final period of testing to be ready for MiFID II on 1 Jan 2018. There is much to do.
In our next blog we will consider the timeframe required to adapt to a post-Brexit trading environment and what this means for necessary transition periods.
If you are interested in a discussion around the topics raised in this piece please contact us Nick Forest