With the triggering of Article 50 coming shortly, the countdown to the UK’s departure from the EU will begin. Banks need to assume the worst outcome in their planning, writes Brian Caplen.

As operational challenges go, Brexit is in a class of its own. In dealing with the regulatory onslaught of the past few years, banks at least had the benefit of a comprehensive set of rules to work from together with a timetable for completion.

Brexit by contrast has no definite shape and, in the worst case scenario, banks could find themselves in the middle of nowhere in March 2019 if the UK crashes out of the EU with no deal and no transitional arrangements in place.

The UK financial community has more or less accepted that continued passporting of services will be impossible. This became clear following UK prime minister Theresa May’s Lancaster House speech in January in which she said the UK would be leaving the single market and negotiating a free trade agreement with the EU.

This has left banks struggling to understand what might replace it and to figure out a strategy with little to nothing in the way of guidance. Putting planning on hold until the end of the two-year Article 50 process is not an option as this would put client business at risk.

Even the fall-back position of having an ‘equivalent’ regulatory regime, under which financial firms from third countries can access the EU, is of little comfort unless there is more clarity about how it will be applied. It can also be revoked at any time.

The worst affected banks are those non-EU banks (US, Japanese and Swiss are the main groups) using London as a hub for the single market. For them restructuring will be a three- to four-year task starting from when the new rules are known. Banks from EU countries have it slightly easier as they can more easily transfer operations to other EU jurisdictions. They might get the work done in two years, but that is still a long time to be in a state of flux.

So what should banks be doing? The Association or Financial Markets (AFME) in its Planning for Brexit report (https://www.afme.eu/en/reports/publications/planning-for-brexit/) surveyed 15 banks of different types and collated their responses. The report notes that some smaller banks may decide that cross-border activities are not worth the trouble and simply withdraw. Even larger banks could retrench to their home markets if they were forced to set up a separately capitalised EU subsidiary in addition to London. So it is not just a matter of moving operations, in some cases, it is a question of shutting them down.

Banks are busy exploring their regulatory and licensing situation to try to come up with interim options that will suffice until the picture becomes clearer. They will then have to take a second step from the interim to the finished article.   

AFME argues for a three-year transitional period following the Article 50 process together with extensive grandfathering rights and the continuing use of prior regulator-approved risk models to try to ease the pain. It also calls for more clarity from regulators about how different cross-border operating models will be viewed and how equivalence will be applied.

The alternative could be a period of market instability which would damage both the UK and the remaining EU members. Hardly what the European economy needs, having only partially recovered from the financial crisis. 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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