LONDON — Britain’s banks and other professional services institutions are going to struggle to fully prepare themselves for Brexit within the two-year deadline, says major finance lobby group AFME.
In a lengthy report, titled “Implementing Brexit: practical challenges for wholesale banking in adapting to the new environment,” AFME said that there was already a “substantial amount of evidence” that banks and clients will find it incredibly difficult to construct and implement new processes and structures in time for the new regulatory landscape that occurs once Britain leaves the EU.
The biggest issues in the report include:
- Clearing — There is huge uncertainty over whether Britain is going to retain the €930 billion daily business and there is “particular concern about ‘cliff edge’ risk to the operations of UK central counterparties, which currently manage more than a quarter of global clearing activity.” In other words, AMFE warns that the industry will struggle if suddenly the EU strips Britain of the rights to clear euros.
- What happens to the legality of existing contracts? — AMFE points out that after Brexit, there could be huge uncertainty over the legality of contracts signed prior to 29 March, 2019 — the official date of Brexit. “A bank which had signed a contract may no longer have the required approvals to lawfully perform the services it had committed to, or can no longer access market infrastructure.”
- The next two years will cause ruptions in client activity — AMFE says that “Brexit creates significant uncertainty for clients and counterparties and the potential for disruption to essential contracts; particularly for clients holding (or planning to hold) long-dated contracts such as swaps, loans or cross-border revolving credit facilities.”
- Financial passporting — If Britain leaves the Single Market, which is the route Prime Minister Theresa May is going down, then this could cause seismic changes to the way the city operates and two years is not enough to prepare for it.
“Financial stability and market efficiency must be safeguarded during the Brexit implementation process and thereafter. These are essential ‘public goods’ for the European economy,” said Simon Lewis, Chief Executive at AFME.
“Given the tight Brexit timescale dictated by Article 50, market participants and regulators are already having to consider important decisions amid considerable uncertainty. Building on our February study with PwC on operational complexity, this paper seeks to provide Europe’s policymakers with insights on the range of implementation challenges facing Europe’s capital markets.”
Britain is hurtling towards a “hard Brexit,” which will see the UK leaving the European Single Market in exchange for complete control over immigration. Negotiations can now officially start after Prime Minister Theresa May triggered Article 50 on March 29.
Britain will leave the EU by the end of March 2019 and must agree with the EU what it will pay as a divorce bill and what the terms of its exit are going to be. The complex, difficult agreement will cover everything from immigration to trade.
The services industry — everything from banking, architecture, IT, and management consultancy — is arguably the most important part of Britain’s economy because it makes up nearly 80% of GDP.
The loss of passporting rights following Brexit is one of the biggest fears in the City of London and seems almost a certainty under May’s “hard Brexit” plan. Passporting rights allow UK-regulated firms to sell goods and services across the EU without being re-regulated in each local market.
If the passport is taken away, London could cease to be the most important financial centre in Europe, costing the UK thousands of jobs and billions in revenues. Around 5,500 firms registered in the UK rely on the European Union’s passporting rights for the financial services sector, and they turn over about £9 billion in revenue.
AFME says that a transitional deal — a leeway period or phased process of implementation of Brexit agreements for Britain — is one of the best options to safeguard the financial industry.
“Transitional arrangements could comprise: a bridging period to avoid short-term disruption until the new trade relationship between the UK and the EU27 is ratified, should that prove unachievable within the two-year Article 50 period; and an adaptation period, following the bridging period, which would enable phased adjustment to the new trade relationship. The sooner that a phasing-in period is confirmed then the smoother the adjustment process will be,” the report says.
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