FCA preparing for 'cliff edge' risks of no-deal Brexit

The FCA says it is currently preparing for a 'smooth transition' out of the EU, but is also considering the possibility of a ‘no-deal’ or ‘hard’ Brexit at March 2019.

Related topics:  Finance News
Rozi Jones
19th July 2018
brexit money
"In concrete terms, insurers may not be permitted to pay out claims on policies, and derivatives users may not be able to manage the risks of their positions."

Nausicaa Delfas, executive director of international at the FCA, outlined the regulator's current focuses, including ‘cliff edge’ risks that would be caused by abrupt loss of passporting.

She outlined the introduction of the Temporary Permissions Regime, which will allow EEA firms and funds using a UK passport to continue to operate, without needing to apply for authorisation at this stage. At the end of last year, HMT announced that they would legislate to enable this if necessary.

The TPR will allow for 'business as usual' for EEA firms and funds passporting into the UK. As at April this year, more than 8,500 financial services firms were registered as passporting into the UK, and nearly 6,000 out of the UK.

Those that receive a temporary permission will be able to enter into new business and fulfil existing contracts with UK customers for a defined period after exit day, while seeking full authorisation.

Delfas said the FCA will be issuing more communications on what firms will need to do in order to register for temporary permission, and will be consulting on the related rules.

She noted other main risks which relate to contract continuity. The FPC has estimated that 10 million UK policyholders and 38 million EEA policyholders could be affected; and that around a quarter of derivatives contracts – £26 trillion worth – could be affected.

If an implementation period isn't achieved, Delfas warned there is a risk that some contracts could not be appropriately serviced, admitting that "in concrete terms, insurers may not be permitted to pay out claims on policies, and derivatives users may not be able to manage the risks of their positions".

Delfas said that the aim, "as far as possible", is to ensure continuity and certainty between existing EU legislation, and that the FCA has been working on identifying the various aspects that may need amending.

She concluded: "Neither the UK nor the EU want to see a significant misalignment in regulatory standards – nor indeed ‘a race to the bottom’ in regulatory standards. But it is likely that after our exit from the EU, our regulatory frameworks may evolve."

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