Paperjam, January 2019

To leave or not to leave?

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Although the UK Government, and its Prime Minister (PM) Theresa May, suffered a massive defeat after the UK Parliament rejected the EU Withdrawal Agreement by a margin of 230 Members of Parliaments (MPs) on 15 January 2019, they later survived no-confidence vote by a thin majority in Parliament.

While the PM is reaching out across political parties to consult on possible alternatives, it is still unclear whether a fundamental shift in UK’s negotiating position might be considered. The UK must now find a way out of the current impasse and finally bring clarity and certainty about its Brexit plan where several future options still remain possible.  However, it is hard to speculate on possible scenarios for the next steps in negotiations, but the motion the PM will put forward could shift some of the previous red lines. These red lines include the extension of the article 50 negotiation period or, less likely, the holding of a second referendum. In all scenarios, the motion could be amended by the MPs. Furthermore, an extension of the negotiation period would dramatically reduce the likelihood of a no-deal Brexit which remains the default option until any agreement is ratified.

In this environment of deep uncertainty, financial institutions must prepare for a worst-case scenario. This has been re-emphasized by the European Banking Authority (EBA), for financial institutions to increase their efforts in advising customers on the specific consequences deriving from the UK withdrawal from the EU, and to further develop effective contingency plans. In particular, financial institutions should assess their obligations to customers and take any necessary actions to ensure continuity of services. From an EU perspective, the UK will become a third country as from 30 March 2019 and, without a ratified Withdrawal Agreement, this has various implications for financial institutions interacting with UK-based counterparties or clients. Although most organizations have already assessed these implications and are quite advanced in their preparedness, some have clearly underestimated their UK exposure and are now engaged in a race against time to mitigate risks resulting from a no-deal Brexit.

A review of all relationships with UK counterparties or services providers, dependencies on UK financial markets infrastructures, as well as data stored in, or transferred to, the UK will help identify the main sources of risk. While an adaptation of business and booking models could be necessary, financial institutions should ensure that they have obtained the necessary licenses required to continue existing business. They should also consider making the necessary changes to potentially affected contracts as well as have regard to the provisions of the EU’s General Data Protection Regulation (GDPR) when assessing their options for the storage or transmission of data (their own and those of their clients). Lastly, as reminded by the European Securities and Markets Authority (ESMA), investment firms and credit institutions, as per their MiFID obligations, should provide customers with accurate disclosure on impacts on the provision of services and investors’ rights that may result from Brexit.