Halfway to Brexit: some progress, but risks remain
16 April 2018
Last month marked a major step forward in the Brexit negotiations, with the UK and EU reaching political agreement on a 21-month transitional period. Now we’re halfway through the two-year Article 50 process, the picture for financial services is starting to become clearer. But despite the progress of recent months, significant risks remain. So what does all this mean for firms?
During the transitional period the UK will have full access to the EU market. Importantly though, complete certainty on the transitional will only come after the entire withdrawal agreement is ratified, which may not be until autumn 2018, or possibly early in 2019. So how does the agreement on the transitional period impact firms’ Brexit plans?
Firms preparing for Brexit should not interpret the transition agreement as an opportunity to press the pause button, but should instead consider how to use the space provided to optimise their plans. Firms may decide to move back some immediate deadlines, particularly as UK regulators announced at the end of last month that EEA firms passporting into the UK have until the end of the transition period to gain authorisation. But as of yet EU-27 regulators have not given similar public commitments, so it’s important that firms continue their dialogue with regulators in the EU-27 to ensure any plans to amend their implementation timetables or other planned actions are within regulators’ risk appetite.
Financial services firms in the UK also need to be aware that they will need to comply with future EU legislation if it comes into force during the transitional period.
In some areas regulators in the UK and EU-27 have provided greater clarity on their positions on certain Brexit issues. The PRA has confirmed its risk appetite for EEA branches of banks and insurers wishing to operate in the UK post-Brexit. The ECB also continues to provide further details on its developing thinking on important issues such as booking models, outsourcing and governance of the banks it will supervise post-Brexit. Recently ESMA also sought to dampen concerns among asset and wealth managers around ESMA’s position on delegation of portfolio management to the UK post-Brexit. But there remains a risk that UK and EU-27 regulators give financial services firms contradictory messages on key issues. Balancing the demands and expectations of regulators on both sides of the channel will be a key challenge for firms undertaking significant business model changes.
The position of the UK Government and EU-27 on what market access should look like post-Brexit remains far apart. But recently there has at least been some further clarity from both sides on their envisaged models.
The UK Government advocates a model of mutual recognition which would allow reciprocal market access based on recognition of each side’s regulatory regimes. Whereas the EU-27 position is that the future relationship on financial services should be market access for UK-based firms via ‘reviewed and improved equivalence mechanisms’.
Despite the progress made, firms should continue to plan for Brexit. Those firms that use the additional time provided by the transitional period to design and refine a post-Brexit operating model that is cost effective and meets the needs of clients and customers may find that this is their competitive differentiator over the medium and long-term.
More analysis on what recent Brexit developments mean for financial services firms can be found here.