I should preface my comments by reiterating that the FCA takes no position on whether Brexit is a good or bad thing in itself. Our focus, as always, is on making financial markets work well, and meeting the FCA’s three statutory objectives, to:
Secure an appropriate degree of protection for consumers.
Protect and enhance the integrity of the UK financial system.
Promote effective competition in the interests of consumers.
And to deliver on these objectives we will support the Government throughout the Brexit process with technical advice and our specialist expertise.
With 8 months until we exit the European Union in March 2019, it is important we all – regulators and industry – continue to plan for a range of scenarios.
The FCA is working closely with the Government, Bank of England, our regulatory partners across the world, and firms, to enable a smooth transition at exit.
In terms of our longer-term future – our markets will remain highly integrated whatever the outcome of Brexit. We believe a good outcome is achievable – one that is in the interests of both the UK and the EU.
Our starting assumption is that a transition or implementation period, from March 2019 until the end of December 2020, will form part of the final agreement with the EU. We think this is a good thing for both sides. It will allow more time to prepare, smooth the transition, and it is something we have been calling for, for some time.
However, we know that this is part of the overall negotiations and therefore we must prepare for all scenarios, including the possibility of a ‘no-deal’ or ‘hard’ Brexit at March 2019. And that is what we are doing: across the FCA, together with colleagues from the Bank of England and the Government, we have been working to develop a number of safeguards and contingencies, in the event of a hard Brexit, to ensure that ‘day 1’ works smoothly.
There are ‘cliff edge’ risks we face in relation to contract continuity.
Our analysis suggests that these primarily relate to insurance contracts and derivatives. The FPC has estimated that 10 million UK policyholders and 38 million EEA policyholders could be affected; and that around a quarter of derivatives contracts – £26 trillion worth – could be affected.
However, the types of contracts affected may be broader than this. You in this room will know well how complex these contracts are, involving not only financing and credit agreements, but also hedges against interest rates and currency movements. Our view is that where any of these contracts extend beyond March 2019, the UK and the EU must, together, create contractual certainty, either through an implementation period or by some other means.
A further key safeguard we have been working on is the Temporary Permissions Regime (TPR), which will allow EEA firms and funds using a UK passport to continue to operate, without needing to apply for authorisation at this stage. At the end of last year, HMT announced that they would legislate to enable this if necessary.
The TPR will allow for business as usual for EEA firms and funds passporting into the UK. As at April this year, more than 8,500 financial services firms were registered as passporting into the UK, and nearly 6,000 out of the UK. Those that receive a temporary permission will be able to enter into new business and fulfil existing contracts with UK customers for a defined period after exit day, while seeking full authorisation.
At day one, our regimes will be equivalent. Our markets will remain highly integrated whatever the outcome of Brexit, and we think working to promote common global standards, alongside our work to onshore a rulebook that is equivalent to the EU on day one, provides a solid basis for cross border business to take place.
It is of course for the Government to negotiate – but we have been clear about the sort of arrangements on financial services that we believe are possible, and desirable, to maximise market access and benefits to consumers in the UK and EU. These include the five principles of:
cross border market access
consistent global standards to support global markets
co-operation between regulatory authorities
influence over standards
the opportunity to recruit and maintain a skilled workforce
Neither the UK nor the EU want to see a significant misalignment in regulatory standards – nor indeed ‘a race to the bottom’ in regulatory standards. But it is likely that after our exit from the EU, our regulatory frameworks may evolve. So we need to find a way to ensure that despite such evolution, frameworks allow delivery of common outcomes.
The scale of the Brexit challenge is unprecedented, but we believe a good outcome is achievable. And from a regulatory perspective, we are working with the Government, the Bank of England and our counterparts across the world to secure just that.
But we all know that time is tight and the path uncertain – so achieving that outcome, and a smooth transition avoiding cliff edges – requires energy and commitment from industry and regulators alike.
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