The European Banking Authority’s (EBA) opinion on the preparations for the withdrawal of the United Kingdom (UK) from the European Union (EU), published on 25 June 2018, is a clear wake-up call for the financial sector.
According to the EBA, there is a real risk that a ratified withdrawal agreement may not be reached despite the best efforts from both sides.
In this scenario, the UK would leave the EU on 30 March 2019 with no transition period, and become a third country for the purposes of the EU’s legal framework. This would have several consequences on financial institutions.
The EBA has observed inadequate progress in the level of preparation among financial institutions for the potential hard exit of the UK from the EU in March 2019 without a ratified withdrawal agreement. Due to the limited time available before the deadline, the EBA has invited the National Competent Authorities (NCAs) to ensure that institutions are not only planning but have also started implementing all necessary actions to avoid any risk of disruption in the financial services industry.
The opinion, while formally addressed to NCAs, contains important information for EU27-based institutions interacting with UK-based counterparties, clients, or customers, as well as for UK-based institutions interacting with EU27-based counterparties, clients, or customers.
In fact, the EBA has requested NCAs to verify whether these institutions are following the sequence set out below in assessing the implications for themselves, and developing a response where relevant. The sequence is:
- identify the risks arising from the UK’s possible departure from the EU in March 2019 without a ratified withdrawal agreement
- consider the implications of the risks (such as implications on solvency and liquidity positions arising from the application of increased risk weights for certain UK exposures, or higher capital requirements for derivatives cleared through non-qualifying CCPs)
- where appropriate, depending on their business models, ensure that the necessary regulatory permissions are in place, both in the UK and in the EU27, to conduct new business and support existing businesses
- carefully consider how any new or expanded entity would fit into a financial institution’s existing organisational structure
- avoid outsourcing activities to such an extent that they operate as “empty shell” companies; all institutions should have the substance to manage the risks they generate from the first day after the UK’s withdrawal
- identify which existing or future contracts will be potentially affected (including derivative contracts)
- identify where their and their clients’ data is stored (whether in the EU27, the UK, or elsewhere), and whether or not this data needs to be transmitted across borders with regard to the provisions of the GDPR
- identify Financial Market Infrastructures, including CCPs, based in the UK (for EU27 institutions) or in the EU27 (for UK institutions) to which they need access
- assess their reliance on wholesale funding and their ability to continue accessing this funding in the event of the UK’s departure from the EU without a ratified withdrawal agreement with a loss of market access
- (for financial institutions subject to the Bank Recovery and Resolution Directive, or BRRD) assess the impact of the UK’s departure from the EU on their minimum requirement for funds and eligible liabilities
The EBA requires NCAs to ensure that institutions provide clear information to customers whose contracts or services may be affected by the UK’s withdrawal from the EU, as soon as that information becomes available to them and, in any event, no later than the end of 2018.
In its role as an NCA, the CSSF requires less significant credit institutions, investment firms, payment institutions / electronic money institutions, lenders, and credit intermediaries based in Luxembourg to take the measures prescribed in the EBA’s opinion. The CSSF will subsequently contact the institutions to ensure that the appropriate steps are followed, except where such information has already been provided to the CSSF. Major credit institutions should refer to the ECB’s instructions.
On 12 July 2018, ESMA issued a public statement emphasising the importance of the timeline to submit requests for authorisation to the NCAs and ESMA for regulated entities planning to relocate in the context of Brexit.
Next up on the KPMG Blog:
Credit institutions, investment firms, payment service providers, electronic money institutions, creditors, and credit intermediaries (financial institutions).
As the EBA made clear in its Opinion on Brexit on 12 October 2017.