City regulator warns on three Brexit ‘cliff-edge’ risks

The UK financial regulator’s head of Brexit preparations has warned that banks and investment firms still face three “cliff-edge” risks when the transition period for leaving the EU expires in seven weeks.

Speaking at Thursday’s City & Financial summit on post-transition regulation, Nausicaa Delfas — the Financial Conduct Authority’s executive director of international — said issues with derivatives trading, the transfer of personal data and offering services to customers in the EU remained a real possibility after January 1.

“We should not assume, even if a deal is agreed, that it will mitigate outstanding risks in financial services,” she said.

The first two of those threats could yet be addressed by a last-minute deal with the EU, she said

Earlier this week, chancellor Rishi Sunak announced that the government would recognise many areas of EU financial regulation as sufficiently tough as the UK’s own standards from January, a process known as equivalence.

That will enable UK-based banks and fund managers to continue accessing EU exchanges, benchmarks and services. He said the UK was “acting unilaterally to provide clarity”.

Brussels has held back, seeking more clarifications from the UK over whether it will stray too far from European norms. It will only let EU institutions access UK markets if it is “in the EU’s interests”.

Without a reciprocal approach, Ms Delfas acknowledged that brokers and fund managers could suffer.

“In the absence of mutual equivalence, some firms will be caught by a conflict between the EU and UK derivative trading obligations, potentially hampering their ability to trade derivatives where they see fit,” she said.

In practical terms, some EU bank branches in London would not know which set of rules on derivative counterparties they must comply with — causing uncertainty and potential disruption to trades.

A lack of agreement on data may also mean disruption to UK financial groups operations, Ms Delfas said. Although the UK government has legislated so that British firms can lawfully send personal data into the EU, Brussels has not completed its assessment of UK data protection. As a result, Ms Delfas said the FCA is advising financial services companies that they will need new clauses in contracts to ensure data can flow from the EU to the UK.

Local agreements that allow UK banks to offer services to EU resident customers will be needed, as well, Ms Delfas said — as this regulatory requirement “cannot be resolved through mutual equivalence”.

Some countries in the bloc had put temporary measures in place when a “no-deal” Brexit was first mooted — but Ms Delfas warned many of these have now lapsed.

UK banks that have not yet made arrangements will need to comply with local laws by January 1, as there is no longer enough time to give EU resident customers the required two months notice of terminating their services.

Lawyers said most of the post-Brexit risks would hurt EU banks and fund managers more than British counterparts.

“Most large UK firms have planned to avoid these cliff edges by setting up in the EU after Brexit, and putting the right terms in customer contracts,” said Simon Morris, a financial services partner with law firm CMS.

“The real obstacle is more of a barrier reef down the Channel, since it’s the EU’s customers who will lose out by being denied access to Europe’s largest capital market,” he said.

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