Two years after the UK’s historic vote to quit the EU, the Financial Times asked senior finance executives which big Brexit risks were still on the table. “What risks have been taken off the table?” responded one of the City’s most senior bankers, in a tone that betrayed the depth of his frustration. A year later, things have improved only slightly.
Finance chiefs and trade bodies say there has been progress in some areas, notably handing out temporary permits to ensure users of EU derivatives are not locked out of UK clearing houses. The insurance sector has also benefited from guidance that permits a “business as usual” approach for companies that have begun to transfer claims to EU entities but not completed them by Brexit day.
But with days to go until the original departure date, uncertainties remain. “The thing that companies are most aware of is obviously the risk of no deal,” says Miles Celic, chief executive of industry body TheCityUK and a member of the UK Treasury’s Financial Services Trade and Investment Board. Consequently, he adds, “they are taking the measures that they need to take” to deal with a disorderly exit.
Those measures — which senior executives describe as “planning for the worst, while hoping for the best” — include buying and leasing property in continental Europe, applying for new or upgraded licences in EU countries, transferring and hiring hundreds of staff, transferring business to new legal entities, and sending thousands of letters to clients about new arrangements. Costs for individual companies have run to the hundreds of millions of pounds.
“We would say that we are Brexit-ready at Lloyd’s, that would [also] be true for the other major cross-border insurance companies,” says Bruce Carnegie-Brown, chairman of Lloyd’s of London, the specialist insurance market. “We got cracking on this really very quickly after the referendum and began by thinking about where we would need to be domiciled in the EU in the event of a hard Brexit.”
Lloyd’s has opted to set up an EU headquarters in Brussels, with easy connections to the UK by rail and air. The organisation is still in the midst of the Part VII court process to transfer policies from its UK entity to a European one so that claims can be honoured, a project that Mr Carnegie-Brown says will take until the end of 2020 owing to the unique complexity of their business as marketplace for multiple insurers rather than a single company.
Mr Carnegie-Brown says the biggest risk for Lloyd’s is a no-deal Brexit which would mean “technically we would not be allowed to pay claims” on policies that have not yet been transferred across to the EU entity. He sees the risk as manageable since most of the bloc’s national regulators have given guidance that claims will be payable as long as the court process is in train.
Lloyd’s “continues to have a strong interest in an equivalence regime”, Mr Carnegie-Brown says, referring to the preferred regulatory arrangements in the UK government’s exit deal for financial services.
If the UK regime were deemed “equivalent” to the EU’s, then it would be easier for UK-based entities to do certain types of business across Europe.
It remains unclear whether equivalence is possible. Conor Lawlor, director of international and Brexit policy at industry group UK Finance, points out that equivalence carries risks of its own since “it can be unilaterally revoked on 30 days’ notice”.
Another post-Brexit risk for banks is the capacity of some customers to deal with the new landscape. Banks have already asked the UK regulator to intervene to make sure asset managers get their paperwork in order, after the sector proved slow to respond to banks’ initial requests for them to transfer their business over to new EU entities to ensure continuity of service.
Bankers say preparations among non-financial companies have been even more piecemeal. One described, with horror, a midsized client which disbanded its Brexit planning committee a few months back because a “hard” Brexit was thought inconceivable.
“We are talking about potentially millions of small business and supply chains impacted in areas like goods and so on,” says Mr Celic. That credit risk ultimately lies with the banks. A delay to Brexit would be “welcome”, he adds, because it would give companies more time to get their houses in order.
Banks also face significant uncertainty over what the UK’s future immigration policies will mean for workers they already employ and the ones they hire in the future. With so many unknowns, Brexit looks set to be a major topic for risk managers in the months ahead. “A lot needs to happen before financial services firms agree that meaningful risk has been taken off the table,” says Mr Lawlor. “Until that happens contingency measures and planning for the worst continues.”