U.K. financial regulators sought to reassure banks and insurers that they can rely on a transition period to ease their adjustment to Brexit, putting pressure on the European Union to do the same.
The statements on Wednesday from the Bank of England and the Financial Conduct Authority are their latest optimistic signal to the industry on the outcome of the Brexit talks. This contrasts with the more cautious line taken by the EU, where regulators stress that firms need to prepare for a so-called hard Brexit, in which the talks on the terms of withdrawal, including the transition, collapse without a deal.
In light of a EU summit decision on the proposed transition, the BOE said it’s “reasonable” for firms doing business in the U.K. under current rules “to plan that they will be able to continue undertaking these activities during the implementation period in much the same way as now.” The BOE also told firms that they can “plan on the assumption that U.K. authorization or recognition will only be needed by the end of the implementation period.”
“The impetus is now on EU regulators to follow suit,” said Stephen Jones, head of lobby group UK Finance. “Without similar assurances from EU regulators, U.K.-based firms serving customers in the EU will be forced to continue implementing costly contingency plans.”
A transition period was agreed on in principle at an EU summit this month, responding to calls from the industry for more time to implement their Brexit contingency plans. UK Finance said at the time that regulators should be given the flexibility “not to insist on worst-case contingency planning” and to address threats that Brexit poses to derivatives and insurance contracts.
The FCA reminded firms that the transition arrangements won’t be set in stone until they’re ratified as part of the withdrawal agreement.
The BOE’s line on the transition may come too late to affect firms’ preparations for Brexit, as many have already started shifting staff and business lines to the continent so they’ll be up and running when the U.K. exits the bloc.
Financial-services companies will have moved more than 1,000 people to Frankfurt by the end of April in preparation for Brexit, according to lobby group Frankfurt Main Finance. The BOE has said 10,000 jobs may be at risk on day one of Brexit.
U.K. Chancellor of the Exchequer Philip Hammond said this month that regulators across Europe could do more to reassure businesses that the transition is “not just delivered on paper,” and that it is valuable for planning for the next three years.
On Wednesday, Hammond said the regulators’ statements and the transition deal “will provide further confidence to financial services firms that there will be a smooth exit.”
“Regulators have recognized that firms cannot alleviate the risks of a cliff-edge on their own, which is why the U.K. government and our regulatory authorities are working to provide the reassurance that firms need,” he said.
That optimism hasn’t been reciprocated across the Channel. When asked on Wednesday if the European Central Bank would be refreshing its own Brexit guidance to banks after the summit, a spokesman referred to previous statements by the ECB’s oversight arm and declined to comment further. A European Commission spokesman also referred back to previous statements.
The ECB has told banks that while a transition arrangement “could be useful,” legal certainty will only come when the entire withdrawal agreement is ratified by both sides. The ECB and national euro-area supervisors therefore expect banks to continue preparing for all outcomes, including a no-deal scenario. The ECB has set an end-June deadline for applications to operate in the euro area after Brexit.
“What clients want to know is that their rights will be respected in the EU, and the Bank of England cannot give much comfort on that,” Rob Moulton, London-based partner at Latham & Watkins, said before the BOE’s announcement. “The extent to which the bank’s guidance will be binding upon the authorities in the EU will be open to question.”
–With assistance from Nicholas Comfort, Alexander Weber and Gavin Finch.
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