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Western EuropeJune 11 2020

Bank of England tells UK banks to prepare for ‘hard Brexit’

Bank governor Andrew Bailey warns chiefs to be ready for a ‘no deal’ scenario at the end of 2020.
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With the Brexit talks between the EU and the UK reaching an impasse, Bank of England governor Andrew Bailey has reportedly phoned the CEOs of large UK lenders on June 2, warning them to prepare for a ‘no deal’ outcome. 

According to UK TV channel Sky News, Mr Bailey told the bank heads to accelerate their planning for the UK to leave the transition arrangements with the EU on December 31 2020, with trade now more likely to be conducted on World Trade Organization (WTO) terms. However, the WTO makes few provisions for services.

Meanwhile, the European Commission is to conclude by June 30 whether the UK is equivalent to the EU on financial rules, a decision that is likely to be political rather than technical.

The Sky News report cited one CEO as saying the call with Mr Bailey suggested that the Bank of England’s assumptions about the outcome of the talks had shifted. Banks are well prepared for a ‘hard Brexit’ and UK regulators believe that the UK’s financial system can cope. 

Mr Bailey’s views appear well founded, as the latest round of talks on June 5 ended in deadlock. At a press conference, EU chief negotiator Michel Barnier said there had been no significant progress and that the UK continues to backtrack in all areas on commitments made in the political declaration. 

To reinject some momentum into the negotiations, UK prime minister Boris Johnson is reported to be planning to negotiate directly with European Commission president Ursula von der Leyen later this month. Mr Johnson had threatened to walk away from the negotiations by June 30 if progress is insufficient. This is also the final date for the two to agree a one or two-year extension to the transition arrangement – a move the UK continues to rule out.

However, at an event organised by the European Policy Centre on June 4, Michael Clauss, Germany's permanent representative to the EU, said EU leaders would focus on the Brexit talks and try to strike a deal by October 15. But he warned that the UK must sacrifice some sovereignty to retain access to the EU’s single market. 

Negotiations founder

The current negotiations have floundered over issues such as the EU wanting to retain unchanged fishing rights in UK waters and an insistence on the UK remaining aligned to EU rules on a range of areas in exchange for favourable trading arrangements.

The UK rejected the demands, insisting that it wants a trade deal similar to the ones the EU struck with Japan and Canada, which do not contain onerous regulatory alignment provisions. The UK side argues that mirroring EU rules would undermine its sovereignty and curtail its ability to negotiate trade deals with other countries. Meanwhile, fisheries – which is a tiny economic sector – are a highly charged issue for both sides, with the UK wanting full control over its  waters. 

Giving an insight into how big the differences are between the two, UK negotiator David Frost wrote an open letter to EU counterpart Mr Barnier on May 19, accusing him of offering the UK  “a relatively low-quality trade agreement coming with unprecedented EU oversight of our laws and institutions” and of including novel and unbalanced proposals. On services, Mr Frost wrote that the EU is resisting the inclusion of provisions on regulatory cooperation for financial services, despite agreeing them with Japan. 

Mr Barnier quickly shot back his own open letter complaining about Mr Frost’s tone. He wrote that every EU agreement with third countries is unique and that the UK is not automatically entitled to the same terms. He added that the UK cannot expect high-quality access to the EU single market if it won’t accept guarantees on open and fair competition.

This article first appeared in The Banker's sister publication Global Risk Regulator.

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