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Friday’s letter from the BoE’s Prudential Regulation Authority coincided with a sweeping speech on the challenges of Brexit from Mark Carney, the central bank’s governor. Mr Carney called for a system of mutual recognition of financial rules between the UK and the EU, whereas the financial stability of both sides would be put at risk if Britain — as “Europe’s investment banker” — crashed out of the bloc without a deal.
However, the BoE stressed in its letter to the City that it must plan for the worst, especially now that Article 50 has been invoked and there is a two-year deadline before Brexit is complete.
The letter, signed by Sam Woods, the PRA’s head, read: “Our current assessment is that the level of planning is uneven across firms and plans may not be being sufficiently tested against the most adverse potential outcomes — for example, if there is no withdrawal or trade agreement in place when the UK exits from the EU, and the UK and EU do not reach agreement on issues such as implementation periods, mutual recognition of standards, and co-operation in financial regulation or supervision.”
It was sent to all companies with a presence in the City, from UK high-street stalwarts to US investment banks, and included European-headquartered firms that use passporting to access the UK market.
The City is worried about what kind of access it will have to the European single market after Brexit. Financial services are not covered by World Trade Organisation rules, which would apply to other sectors in the event of no accord. Furthermore, if companies decide they need to relocate staff or set up new EU hubs, they have only two years to do so.
The outcome of the Brexit negotiations will be key to the endurance of the post-crisis consensus on tighter financial regulation, Mr Carney said. Supporters of a unified approach fear that Brexit and the election of Donald Trump to the White House will both lead to deregulation and different rules for different jurisdictions.
“The outcome of the Brexit negotiations could prove highly influential in determining which path the global financial system takes,” the BoE governor added. He has previously advocated a system of “super-equivalence”, whereby countries allow mutual access if they follow commonly agreed standards.
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PRA's Woods letter: Contingency planning for the UK’s withdrawal from the European Union