On 26 February the British Government published Implications for Business and Trade of a no-deal exit on 29 March 2019. This is a summary of presumably much more detailed confidential Government assessments. Its tone and content cannot be separated from the Government’s current political objective which is to secure Parliamentary agreement to the draft Withdrawal Treaty: in other words, it is not intended to, and does not, provide confidence that a no-deal Brexit would be free from disruption.
To cut to the chase, what does the Government say?
It says that the UK financial services industry is broadly prepared for no-deal Brexit and both firms and Government have done what they can, which is probably enough, but because the EU has only taken the limited action that suits it in order to avoid financial instability, there remains a risk of some disruption, particularly to EU customers, in the event of no-deal.
What have firms and Government done?
The paper summarises the main actions that have taken place. Firms have established entities in the EEA in order to be able to continue to trade with access to passporting rights. The British Government has acted in order to allow the two regulators to implement a temporary permissions regime. And some other EU member states have also legislated in order to provide for no-deal and in order to provide continuity.
Either accidentally or deliberately, the paper probably understates the level of preparedness. For example, it doesn’t make clear that the PRA required all firms to have Brexit contingency plans, and then monitored them; nor that EIOPA’s most recent opinion was explicitly intended to secure policyholders’ rights after a no-deal.
And how far has that got us?
The Government’s summary position is that 'the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly exit. And most risks of disruption to the financial services that EU firms provide to UK households and businesses in the event of a disorderly exit have been addressed.'
And what are the continuing concerns?
The main continuing concern is that, to quote the Bank of England’s most recent Financial Stability Report, 'it is unclear how comprehensive Member State actions to mitigate certain risks will be by March'. In practice, this is being rather polite: it is clear to practitioners that the attitude of EU financial services regulators has varied wildly from the pragmatic, well-informed and entrepreneurial to the ignorant, unhelpful and obdurate. Indeed, this is one core reason why everybody has not gone to one place and instead are spread out among at least ten EEA locations. Furthermore, as the paper acidly points out, 'The Commission has stated that it is only focusing on areas in its self-interest, for EU financial stability, and that any decisions taken may be conditional and time-limited.'
The unstated implication is that generally UK customers will be fine but some EU customers – both businesses and firms - will be left unprotected in the event of no-deal.
Do you agree with the paper?
Yes, broadly. The paper probably understates the level of preparedness activity on the part of the UK regulators and our larger and more sophisticated financial services businesses, but acknowledges quietly that some smaller such businesses have allowed themselves to be taken by surprise by an eventuality that was only too predictable. It also points out that the EU and EEA regulators have only allowed themselves to be helpful insofar as that will protect their own core interests. These observations are consistent with our clients’ experience.