Politicians on both sides of the Channel must “urgently” agree a Brexit transition deal to avoid a legal and regulatory cliff edge which would cause chaos for firms and threaten financial stability, according to a lobby group for Europe’s biggest banks.
The Association for Financial Markets in Europe (Afme), which counts JP Morgan, Lloyds, and Citi among its heavyweight members, will today warn that failure to act will leave even the best-prepared firms vulnerable to massive disruption as data transfers become illegal and contracts with clients become void overnight.
Simon Lewis, Afme chief executive, said: “There are now less than 15 months before the UK leaves the EU and the financial services industry continues to face significant uncertainty. It is therefore imperative that agreement is reached as soon as possible on transitional arrangements.”
Five key cliff edge risks
|Cross-border personal data transfers||
Restrictions on sharing of personal data between the EU27 and the UK as a result of Brexit could severely disrupt the ability of businesses to continue to transfer personal data post Brexit. For businesses to continue to operate on a cross-border basis, an arrangement is required to ensure the ongoing free flow of personal data post Brexit.
|Continuity of contracts||
When the UK leaves the single market, existing passports enabling UK-based firms to engage in regulated activity in the EU27 (and vice versa) will cease. This creates important questions for businesses regarding the continuity of services under existing cross-border contracts.
|Choice of jurisdiction; recognition and enforcement of judgments||
There is a very significant volume of financial services contracts where the parties have chosen the jurisdiction of the English courts. It is therefore important to provide clarity that continued recognition will be provided to the choice of jurisdiction throughout the UK and EU and that judgments of the courts of a Member State and of the UK will continue to be enforced throughout the UK and EU27.
|Access to market infrastructure: recognition of CCPs||
In the absence of transitional arrangements, EU27 banks could find themselves in breach of regulation for maintaining positions in UK central counterparties (CCPs) that would no longer be authorised or recognised under EU regulation. EU27 banks may also be required to hold a significantly increased amount of regulatory capital against positions in UK CCPs. While an equivalence framework for CCPs is in place in the EU, it is necessary to ensure that there is no gap while equivalence is formally assessed.
|Recognition of resolution actions||
Without an intergovernmental agreement, the automatic recognition would no longer apply as between the UK and EU27 following Brexit, which could create issues for financial institutions, including: the potential requirement for EU27 banks to amend or reissue contracts governed by English law and isues with debt during bailouts.
Firms will not be able to solve some key issues themselves, so need a transitional deal, Afme will warn (Source: Afme)
While many international banks with London-based EU headquarters have already planned staff moves in response to Brexit, regulators at the Bank of England believe the flow of jobs out of London will speed up significantly if there is no transitional agreement in place by the end of March – a year before Brexit on 29 March 2018.
Cross-border wholesale banks are particularly concerned with getting a transitional deal so that business done in London with EU clients and vice versa can continue to function.
The EU and UK government must agree a framework to secure cross-border data transfers and contracts after Brexit or risk firms running out of time and harm market functioning, Afme said.
The risks extend to the legal and regulatory underpinnings of large parts of the financial system. The EU needs to give firms information on whether UK judgements will be applicable after Brexit, Afme said.
Meanwhile, the crucial clearing industry could also face unprecedented upheaval if mutual recognition of clearing houses on either side of the Channel is not reached. London currently dominates the global trade in interest rate derivatives, so if clearing houses such as the London Stock Exchange Group’s LCH are not recognised banks would have to pay as much as €40bn in additional margin to back up their trades, Afme calculates.