FCA chief executive Andrew Bailey has warned that unless handled wisely, with a transition period and co-operation between various parties, the UK’s departure from the EU could have a severely detrimental impact on the financial services industry, and hence the real economy, for all concerned.
Speaking in the City of London in February 2018, Bailey said that in the event of a hard Brexit, insurance and derivative contracts between the UK and EU counterparts could cease to be serviceable, affecting up to 36 million policyholders and a notional £26 trillion in derivatives contracts, if passporting no longer applies to UK firms operating in the EU. In addition, UK and EU central counterparts could also be in breach of regulation by providing clearing services in the other jurisdiction, with a risk to financial stability and a cost to the real economy. There would also be major implications for data held by the UK and the EU if there were breaches of national law.
Bailey said that a transition period for the UK’s departure needed to be agreed by the end of March, in order to give space and support for regulators to work with firms and political authorities in order to put practical solutions in place. “As an impartial technician, I cannot stress too much that we need these arrangements in place, and co-ordinated solutions are in the best interests of both sides.”
Looking at the future relationship between the EU and UK, Bailey called for mutual recognition and convergence on financial services regulations, arguing this was possible as the EU proposed it in the TTIP deal, and was pushing for similar principles in the post-Brexit fisheries policy with the UK. He added that material regulatory divergence did not make sense in financial services: “Markets are global and we cannot in practice diverge much in terms of regulatory outcomes, and regulatory arbitrage is not an allowable ground for competition.” In addition, market fragmentation would raise costs for all parties, reduce diversification and transparency and increase risk.