3 minute read 15 Sep 2020
Houses of parliament at sunset London

How to prepare for Brexit in 2021

Authors
Andrew Pilgrim

EY UK Government and Financial Services Leader

Expert in public sector engagement and financial services. Worked across political, regulatory and policy issues that shape the sector.

Vera Kukic

EY EMEIA Financial Services Brexit Lead

Transformation professional. Passionate about innovation and technology. Strong advocate for diversity and inclusiveness. Diligently working on reducing golf handicap. Amateur painter and avid skier

3 minute read 15 Sep 2020

With over 100 days until the UK’s planned withdrawal from the EU, financial services firms need to be prepared for a no-trade deal Brexit.

In brief
  • EY has identified key areas for financial institutions to prioritize over the coming weeks to be better prepared for a no-trade deal Brexit.
  • Firms should consider any regulatory challenges, the ability for people to travel and work abroad, and the broader impact of a trade deal not being agreed.

The UK is over half-way through the status-quo transition period that began when it left the European Union (EU) on 31 January 2020, with only months to go before it leaves the structures of the single market on 31 December 2020.

The end of June was an important milestone in the transition period. Under the Withdrawal Agreement, it was the last chance for both sides to agree an extension. Under the Political Declaration, it was also the date targeted for equivalence assessments in financial services to be undertaken and future fishing quotas to be agreed for the new relationship.

With no extension requested, the UK will be outside the EU single market on 1 January 2021. The negotiations are believed to be stalled on four big issues: fair competition in trade, governance, fisheries and security.

While both sides are now in intensive in person negotiations, it is difficult to see there being time for a deal to be struck before October. There are even hints from the UK Government that it might walk away from the talks if no progress is made in order to dedicate resources to preparing for life outside the single market.

For the financial services industry, there is at least some certainty. Passporting will end on 31 December, to be replaced with third-country rules, or at best, equivalence. Free movement of people and guaranteed data transfers will end. What is unclear is whether there will be any UK/EU agreements providing access over and above those prescribed by the WTO and the EU’s standard third-country treatments.

Regardless, 1 January will mean significant changes. Structure and strategy, access to customers and customer migration, data, mobility, access to market infrastructure, governance, and relationships with supervisors will be some of the big issue’s firms need to grapple with.

Preparing for the end of the transition period

With passporting ending on 31 December 2020, regulators in the UK and EU have stressed the importance of all firms being adequately prepared for the end of the transition period and all possible contingencies.

In the UK, the Financial Conduct Authority (FCA) has called on all firms to consider how the end of the transition period may impact their business and their customers. It expects firms to continue to consider the implications of a range of scenarios, including the possibility that the UK and the EU do not conclude a free trade agreement or make any equivalence determinations before the end of the transition period.

In the EU, the European Banking Authority (EBA) has called on all banks to finalize the full execution of their contingency plans in accordance with the conditions agreed with the relevant competent authorities and ensure adequate communication to concerned EU customers. Where UK banks are establishing operations in the European Economic Area (EEA), the European Central Bank (ECB) expects them to “reach their end-state target operating models” soon. The ECB warns that “banks that have failed to hire staff with sufficient seniority and skills, neglected to make necessary transfers of material assets, or unduly split trading desks across multiple legal entities, will not be considered as complying with the ECB’s requirements. Not addressing this qualitative dimension means operating as (half-) empty shells — something that the ECB will not accept. The ECB’s expectation is very clear: all activities related to European products or European customers should, as a general principle, be managed and controlled from entities located in the EU.”

The European Securities and Markets Authority (ESMA) has also urged financial market participants to finalize preparations and implement suitable contingency plans before the end of the transition period. By 1 January 2021, it expects financial market participants whose activity might be impacted to have fully implemented their preparatory measures to mitigate any risks stemming from the end of the transition period and also have provided appropriate information to their clients on any resulting consequences.

Summary

This article is based on the latest in a series of board papers assessing the potential direction and likely implications of Brexit for the financial services sector.

We outline the key areas boards should prioritize over the coming weeks to be better prepared for a no-trade deal Brexit. These include regulatory challenges, the ability of people to travel and work in different countries, the transfer of date cross-border, and tax considerations amongst others.

About this article

Authors
Andrew Pilgrim

EY UK Government and Financial Services Leader

Expert in public sector engagement and financial services. Worked across political, regulatory and policy issues that shape the sector.

Vera Kukic

EY EMEIA Financial Services Brexit Lead

Transformation professional. Passionate about innovation and technology. Strong advocate for diversity and inclusiveness. Diligently working on reducing golf handicap. Amateur painter and avid skier