The increasing prospect of a No Deal Brexit is prompting new concerns that there are still ‘substantial’ regulatory gaps between the EU and UK in parts of the financial services sector.
In a report published on Tuesday (16 July), the Association for Financial Markets in Europe (AFME), an industry lobby group, warned that “while a very substantial amount of work has already been undertaken to mitigate risks by both firms and regulators, a no-deal Brexit is likely to have a significant impact on the financial services sector and regulatory and operational challenges remain.”
Few mitigation measures have been put in place in recent weeks as time runs down on Theresa May’s government. Both Boris Johnson and Jeremy Hunt, the two contenders in the contest to replace May as prime minister next week, have vowed to renegotiate her Withdrawal Agreement or leave without a deal at the end of October.
The UK’s financial services industry remains one of its most important economically, and the City of London is comfortably Europe’s largest financial services centre.
Fears that the UK is edging closer to a No Deal Brexit have prompted a fall in the value of the pound to its lowest level in more than two years this week.
AFME added that the scheduled Brexit date of 1 November, which falls on a Friday, could also pose a problem for the sector.
“This will give rise to additional operational challenges, in particular, mid-week code release for new reporting as firms will not have a weekend in which to switch over systems,” the report stated.
At a campaign event last week, Johnson stated that the costs of a no-deal Brexit were “vanishingly inexpensive for us to prepare”. However, there is still plenty of uncertainty about the prospects of a No Deal on financial markets, and a number of regulatory gaps.
Chief among those is the status of the central counterparties, which facilitate trades in the equities and derivatives markets.
Around €1.4 trillion of European assets are managed in the UK, and more than twice as many euros are trading in the UK than in the entire eurozone.
In February, the European Securities and Markets Authority (ESMA) announced that three UK-based central counterparties (CCPs) – LCH Limited, ICE Clear Europe Limited and LME Clear Limited – would be recognised to provide their services in the European Union in the event of a no-deal Brexit.
However, the equivalence decision is due to expire on 30 March 2020, and UK-based CCPs are legally required to give notice three months beforehand.
The status of the CCPs is a decision for the European Commission, which could either amend or extend the equivalence decision. However, other issues, such as rules on share and derivative trading obligations, will require both the EU-27 and the UK to agree to grant each other equivalence.
“The UK government still hasn’t set out its approach on these matters,” a market analyst told EURACTIV.
Market observers are expecting a flurry of activity by the new UK government and regulators after the new prime minister takes office on 23 July. Meanwhile, around ten EU member states are yet to put in place national contingency measures for a No Deal scenario, according to industry sources.
“Much work has been done to address risks of a disorderly Brexit. But with the prospect of no-deal in just over three months’ time, it is important for regulators across the EU and the UK to continue to work together and provide clarity on remaining issues,” Oliver Moullin, AFME’s Managing Director for Brexit and Head of Recovery and Resolution.
Last week the Bank of England stated that while there had been ‘some improvement in the preparedness of the UK economy for no-deal Brexit’, this did not diminish the economic risks of a No Deal scenario.
“Being ready for financial stability does not mean market stability. Markets will adjust, potentially quite substantially if there is a no-deal Brexit,” said Bank of England governor, Mark Carney.
“It also doesn’t mean economic stability. Even with a smooth adjustment, it would still be a major economic adjustment, a major economic shock, virtually instantaneously,” Carney added.
[Edited by Zoran Radosavljevic]