"If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in."
In a Mansion House speech yesterday, Woods said: "If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Firms would start discounting the likelihood of a transition in the central case of their planning."
Woods said that following the referendum, international banks and insurers are "planning to beef up their existing EU operations or considering where to establish a new entity".
He said that although contingency planning will initially be "much more prudent and prosaic than hovering over the relocate button or rushing to the exit door", any re-structuring by firms will in general increase their complexity.
He added: "I struggle to see an outcome in which banks and insurers do not get harder to supervise and harder to resolve for all involved."
Woods said that the most important factor for financial services was establishing "some form of transition or implementation period".
He explained: "This will not only help mitigate the Day 1 risks, but will also enable firms to adjust to the new relationship in an orderly way. While it is highly welcome that the UK government is clearly committed to this, the EU’s position on transition is not yet clear – despite some obvious risks to EU financial stability in its absence."
Woods also predicts that many EEA-based firms will begin to apply for authorisation "on the assumption that access akin to their current passporting rights to operate in the UK will fall away".
Woods added that if he is correct in his assumption, "authorisations are going to be a significant operational challenge for the PRA".
Concluding, he said: "We particularly want assurance that firms have considered ‘cliff-edge’ scenarios where there is no negotiated agreement for financial services in place when we exit, and the two sides do not reach agreement on issues such as transition, mutual recognition of standards, and co-operation in financial regulation or supervision.
"We are also engaging with financial institutions, trade bodies, the FCA and the government to unpick cross-sectoral problems. The two uppermost in our mind are the need to ensure that existing insurance and derivatives contracts can continue post-Brexit, and that data can be shared within groups across the UK/EU27 border. It would be messy and difficult for all firms to try to self-solve for these risks and I hope that we can find suitable fixes as the Brexit negotiations progress."
