The City's Brexit planning problem: Banks don't know what the worst case scenario is

  • Finance firms “preparing for the worst but hoping for the best” on Brexit.
  • Lack of clarity on what “the worst” is, amid reports that contingency plans submitted to the PRA differ on what they’re preparing for.
  • Germany’s finance watchdog says firms must prepare for “a so-called cliff-edge.”

LONDON — Finance firms are “preparing for the worst but hoping for the best” when it comes to Brexit, according to Bertrand Lavayssière, the UK managing partner of financial services consultancy Zeb.

There’s only one problem: they don’t know what the worst-case scenario is.

While most finance firms agree that jobs will have to move in a worst case scenario, Lavayssière said that contingency plans submitted by banks to the UK regulator show institutions have different ideas of what the worst outcome from Brexit could be.

The Prudential Regulation Authority (PRA), the Bank of England’s body for regulating banks, building societies, and investment firms, asked all regulated entities to submit a Brexit contingency plan by July of this year. It received over 400 submissions.

Speaking at an event organised Zeb in London on Tuesday, Lavayssière said he has heard there were two key takeaways from the exercise:

  1. There are differing views of what the worst case scenario could be for firms;
  2. Whatever the worst outcome is, it will require an “absurd” amount of capital to implement contingency plans.

Lavayssière didn’t elaborate on what the variation in planning and worst case scenarios looks like but it suggests an additional layer of complexity for both companies and regulators in dealing with the post-Brexit financial services landscape.

The Association of Financial Markets in Europe (AFME) estimated in June that a “hard” Brexit could cost UK banks €15 billion (£13.1 billion) and add €40 billion (£35 billion) to tier one capital requirements.

The PRA declined to comment.

Business leaders have repeatedly called for more clarity from the government over what Brexit will look like, warning that uncertainty will force many to relocate jobs out of the UK. RBS chairman Sir Howard Davies told Sky News at the start of this month that jobs will begin to move unless details of a Brexit deal are known within months.

Lavayssière made his comments while introducing a speech from Felix Hufeld, the President of Germany’s top finance regulator BaFin.

Hufeld said that firms operating across both the EU and UK post-Brexit have many regulatory options — a branch could be converted to a subsidiary or a headquarters moved to a new location, for example — which creates a headache for regulators and firms alike.

Sam Woods, the head of the PRA, told Reuters last month that it expects 130 European firms to apply for regulation in Britain to ensure uninterrupted services to UK clients post-Brexit.

Hufeld said that all parties “have to assume” that the UK is heading for “a so-called cliff-edge” Brexit because of the lack of progress on negotiations.

“Since, like everybody else, we regulators don’t know what the situation will be in April 2019, we have to think in terms of scenarios and hope for the best and prepare for the worst,” Hufeld said.

Four of Britain’s five biggest lobby groups wrote to the government over the weekend to demand more clarity over Brexit, warning of “wide-reaching and damaging consequences for investment and trade” unless a transition deal is agreed imminently.

Firms are expected to begin executing contingency plans early next year and Hufeld said: “Have we hit the point of no return? I don’t think so. But we’re getting closer. I think somewhere around early next year.”

Asked after his speech about the PRA rumours, Hufeld said he had “heard the same thing” but said it was “premature” to estimate how much capital banks would need for Brexit.

Hufeld’s speech highlighted just where the costs may come from, as he said: “Banks that are planning a comprehensive division of work between offices in London and the EU need to transplant and split up their ecosystem established over the years. That means IT infrastructure, knowledge, process, people, and a lot of other things.”

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