Brexit in Financial Services – the need for transition

09 August 2017

In the first of a suite of three articles, we explored the challenge of Brexit for financial service firms. We now look at the timescale required for implementing Brexit and our next article investigates the pragmatism necessary to avoid major market disruption. Bank transformation programmes are complex, lengthy and resource-intensive, as many banks only know too well. In our report for Association for Financial Markets in Europe (AFME)(Operational impacts on wholesale banking and capital markets in Europe) we examined the timescale taken for a range of transformation programmes. Even the simplest movement of a small trading function has taken up to two years, and a large scale multi-jurisdictional operating model transformation can take five years, or more.

AFME study model


In relation to Brexit, we broke up the typical Brexit programme into 25 elements and by applying typical timings we found that banks with hub-based legal entity structures would require five years to complete a normally scoped Brexit implementation programme. While many insurers and asset managers have been used to operating pan-European structures, they still face similar challenges. For example, restrictions in the the ability to delegate authority across the UK and EU27 would require considerable operational changes.

This leads to two conclusions:

1.) Need for transitional arrangements

The first is that there is an urgent need for agreement on transitional arrangements to allow banks and other financial service providers the time to adapt to post-Brexit trading arrangements. Our analysis suggested years, provided there is sufficient clarity on the end-point which firms are transitioning to. This need is not restricted to the financial services industry. The UK shipping, pharmaceutical and automotive industries have added their voice. Mike Hawes, chief of the SMMT said at their annual conference: “We need a clear interim arrangement – an arrangement enabling ‘business as usual’ from day one”. He added that the two-year deadline set by Article 50 “cannot be delivered”, saying it is more likely to take five years.

The need for transition seems to be acknowledged on both sides of the Brexit negotiation. Theresa May made specific mention of implementation periods in her letter triggering Article 50. Philip Hammond has been vocal in his support of transitional arrangements to avoid a “cliff-edge” as the UK exits the EU and David Davis acknowledged that transitional arrangements may be required . On the EU-27 side, the European Commission guidelines for Brexit negotiations incorporate the possibility of transitional arrangements, provided they are clearly defined, limited in time, and subject to effective enforcement mechanisms. The commission proposed they be limited to three years.

2.) Financial institutions need to implement “Brexit-min” quickly

Despite general agreement on the need for transitional arrangements, the Brexit negotiations are set to focus on the divorce financial settlement and then future trading arrangements. It is therefore unclear when there will be any announcement on transitional arrangements which businesses could rely on. This means that financial institutions have to continue planning on an abrupt exit from the EU on 29th March 2019. At that date, they have to have a minimum amount of capability in place to maintain business continuity across their UK and European clients. In this timeframe, there will be no place for long-term planning, or targeting an ideal end-state. Rather, regulators and institutions require short-term, pragmatic solutions to maintain cross-Europe capability and avoid market disruption. This is the topic of our next article. If you are interested in a discussion around the topics raised in this piece please contact me.

Nick Forrest | Director
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