The Financial Conduct Authority, Britain’s key financial regulator, warned that a so-called “cliff edge Brexit” — a Brexit with no transitional period — could have a negative impact on Britain’s financial services sector.
In a letter from FCA chief executive Andrew Bailey to the head of the House of Commons’ Treasury Select Committee, Andrew Tyrie, the regulator said that a “cliff edge Brexit” could make the job of refereeing and discouraging bad behaviour in the financial sector more difficult.
Here is the key extract from Bailey’s letter:
“Any lack of certainty with regard to the regulatory framework may affect the ability of the FCA, and perhaps other regulators, to take enforcement action as a means of both addressing and deterring misconduct. Cooperation between regulators relies upon a clear framework which sets expectations as to what is required of whom, when, and to what end. Without that clarity it may become difficult to properly discharge our regulatory functions.”
The FCA regulates the conduct of around 56,00o finance companies in the UK, and has previously been criticised for its apparent “light touch” regulation of The City’s banks. However, since Bailey took charge in mid-2016, the regulator has been keen to emphasise its role in ensuring good behaviour among Britain’s financiers.
Bailey’s letter to Tyrie, dated January 13 makes very clear that the FCA sees its job getting much more difficult if Britain doesn’t get some form of transitional deal.
“From an FCA perspective, the most critical risks relate to market integrity and consumer protection, but there are also competition risks, and wider legal, operational and general market stability risks to consider,” Bailey writes.
Bailey also takes time in his letter to discuss the likely loss of the UK’s financial passport thanks to Brexit.
British banks currently have the right to “passport” their financial licences in one EU market to another, preventing them having to go through the costly and complicated process of being regulated in each market where they operate.
The financial passport’s status is strongly tied to Britain’s membership of the European Single Market, and as a result is widely expected to be lost as part of any Brexit deal.
Discussing passporting, Bailey suggests that firms currently operating in the UK thanks to the passport, may keep doing so after Brexit, if a new regulatory framework is not clear after Brexit:
“Following the UK’s withdrawal from the EU, and if such passporting rights and single market protocols no longer apply, there is a risk that those firms may continue to do business in the UK – perhaps inadvertently – without having the appropriate regulatory permissions in place.”
Bailey added that the FCA does not currently have the ability to forecast exactly how much money would be lost once the passport is removed, saying: “We do not have a measure of the value of financial services that may be impacted in the event that passporting arrangements were no longer applicable to UK financial firms alter the UK’s withdrawal from the EU.”