Brexit – The Countdown Begins
Key Challenges for Financial Services Firms
With the prospect of only 2 years until the UK leaves the EU this paper explores some of the key challenges around Brexit as firms start to consider their future footprint
Brexit will end over 40 years’ primacy of EU law in the UK. The UK government will therefore need to decide what laws it wants to remove, keep or change. This will include negotiating a unanimous agreement with all the remaining EU states on a future trade deal. This is likely to be a complex and lengthy process.
Regulators are starting to call for transitional arrangements to preserve the right of UK firms to access EU clients after this deadline but this is by no means certain. Firms therefore need to make their own assumptions now and adapt these as necessary as the situation becomes clearer
Around 5500 firms hold at least one passport to use the UK as a gateway to the EU. A further 8000 firms passport from the EU to the UK. A worst case ‘hard Brexit’ outcome would mean that the UK would be regarded as a third country by the EU meaning these passports are no longer valid.
Many firms are starting to plan for this worst case scenario and looking to establish or build out subsidiaries in another EU state in order to retain their passporting rights.
The UK government is on track to invoke Article 50 at the end of March 2017. In a worst case scenario where no transitional period is agreed, UK firms will have only 2 years to establish a presence in another EU state in order to preserve their passporting gateway. Likewise EU firms wanting to continue business in the UK will need to apply to the regulators for the necessary permissions. Firms without existing pan-European structures probably face a change programme of 3-4 years to establish a new legal entity in another EU country. Those with existing structures are likely to need 2-3 years.
Regulatory permissions alone can take 6-18 months with 2 years for more complex areas such as model approval. These timescales may be elongated as potentially thousands of firms put pressure on regulatory timetables.
“We are working with authorised firms to understand their plans for the future of their cross-border operations into the EU, and from the EU to the UK”
– Andrew Bailey, CEO, Financial Conduct Authority
“We must be prepared to do this by assuming a hard exit by the United Kingdom – it would be irresponsible to presume otherwise”
– Jamie Dimon, CEO, JPMorgan Chase
It is clear that Brexit will challenge the boundaries of traditional project management and require exceptional agility to negotiate an ever-evolving landscape affecting multiple businesses. Traditional approaches with clearly defined scopes, structured plans etc will not work.
Aside from strong project leadership, firms will need to establish a cross-business Brexit Taskforce with very senior sponsorship and close attention from the Board. Regulators are paying close attention to Brexit plans, not least to seek assurance that clients will not be disadvantaged or disrupted.
A potential approach Brexit planning would be to break down the business into its constituent critical parts and assess the impact of the loss of passporting rights. Recovery and resolution plans would be a good starting point, as would the breakdown of critical functions in business continuity plans.
A risk-based approach to planning is a good way of ensuring all aspects of the impact of Brexit are considered. Strong engagement from the relevant business and risk leads is needed to derive the key areas of focus.
Temple Grange Partners have developed a checklist to help guide clients through key areas of Brexit planning. Examples include the following:
- Access to infrastructure providers in countries where such infrastructure may be less mature
(eg payment systems, central counter parties, exchanges, depositories, fund managers)
- Potential for increased cost of clearing and margining requirements eg due to fragmentation across jurisdictions
- Agreements over KYC and AML
- Fraud/reputational risk associated with the new jurisdiction
- Data privacy requirements eg over records management, cloud based data and location of data centres and back up
- Any implications for contracts with third party and outsourced providers eg additional regulatory permissions or notifications are required in some countries
- Technology eg location of data centres and back up sites with associated requirements around data privacy
- Tax and VAT implications
- Employee risk eg risk of losing talent due to transfer of business overseas
- Talent and quality of training in other jurisdictions
- Models- differences in regulatory approaches to risk weighted assets and model approval
- Capital implications – eg potential for holding double capital while approval is sought to move from legacy to new legal entity
- Regulatory reporting requirements and any changes needed to coding/limit management
- Differences in approach for minimum thresholds
- Target client types and any changes in regulatory requirements over conduct of business across target products
- Contractual clauses relating to EU
and any need to repaper clients due to change in legal entity
Firms that want to ensure their position in the post-Brexit EU need to take definitive action now to assess their risks, decide their strategic business model going forward and get on with the planning. Waiting is unlikely to get more clarity given the complexity of this climate – and there is a clock ticking – so firms need to determine their own destiny and move forward with conviction.
Want to know more?
Temple Grange Partners have developed a Toolkit to guide firms through the key Brexit considerations and can provide skilled programme managers who understand the business to help drive your Brexit programmes. Please contact us if you would like to hear more.
“Our current assessment is uneven across firms and plans may not be sufficiently tested against the most adverse political outcomes”
– Sam Woods, CEO, Prudential Regulation Authority