The Financial Conduct Authority is warning about risks to financial services firms over the U.K.'s exit from the European Union if a withdrawal agreement is not ratified by March 29, the U.K. financial services regulator said Thursday.
Specifically, the scenario means a loss of EU passporting rights. A series of passports currently give U.K. financial services firms access to European markets. However, when the U.K. leaves the EU, "these provisions will end," the FCA warned.
"While passporting could partially be replaced by both the U.K. and the EU agreeing their regulations are equivalent, our assumption based on the position of the European Commission is that there would not be blanket equivalence decisions that allow for similar market access as now," the FCA said.
Instead, the FCA said it was in contact with larger firms to ensure that contingency plans are in place or they have decided not to continue to offer services in the EU.
"Many firms have already begun to implement their contingency plans," the FCA said.
As U.K.-based firms implement contingency plans, related to the servicing of European clients or U.K. clients using European financial products, the FCA said: "Execution of firm contingency plans could lead to market fragmentation and increase cross border risk. Over time, market fragmentation could have a harmful impact on financial services' markets more widely, through reduced competition and increased costs for customers in both the European Economic Area and U.K."
At the request of U.K. Treasury, the FCA conducted an assessment of likely consequences of the U.K.'s exit on the financial services industry if the withdrawal agreement is not ratified by March 29. That deadline was triggered when British Prime Minister Theresa May enacted Article 50 of the Lisbon Treaty, which commenced the withdrawal process. A withdrawal agreement published Sunday said that the EU and U.K. intend to agree upon a new framework by Dec. 31, 2020.
However, "if the EU and the U.K. do not ratify the withdrawal agreement in time for March 29, 2019, absent any other agreement, the U.K. will leave the EU with no implementation period or alternative arrangement in place," the FCA said, adding that "the EU legislation would (then) cease to apply in the.K."
The FCA also outlined risks that will remain if the withdrawal agreement is ratified by March 29, but that could occur during a transition period before Dec. 31, 2020. Only until March 29, the U.K. will remain involved in the decision-making structures of the EU and remain a voting board member of European Securities and Markets Authority.
However, the U.K. regulator said that more than 30 EU legislative files relating to financial services are currently under discussion by the European institutions. "It is not certain how many of these the U.K. will ultimately need to put in place during an implementation period," the FCA warned.
U.K. authorities can seek to reduce risks as European Commission and European Parliament make legislative proposals during the transition period. "These would take time to be agreed and implemented by continuing to engage closely with EU partners during this period, but the amount of influence we can have is uncertain," the FCA warned.
While, the political declaration appropriately recognizes that this must be in the context of both sides retaining autonomy over the exercise of their equivalent regimes, it is not possible to rule out that new risks could arise at the end of the implementation period, the FCA said.