I’d normally hesitate before adding to the torrent of current writing on Brexit but there are three points worth making about the challenges it poses for the FCA and PRA – and probably for other UK regulators in different industries.
I haven’t seen these points drawn out elsewhere, and it should benefit firms to have a better understanding of how regulators are likely to experience the challenge of Brexit as it continues to evolve, and how this may affect how they approach it.
1. Responding to uncertainty: Brexit is an unusual problem for regulators because of the high degree of uncertainty. Typically, they would be able to place reasonable reliance on at least two of: (i) the date of the change; (ii) it’s likely nature, and (iii) the desired state beyond. With Brexit, all three are uncertain - whether there will be a deal (and if so its nature), the shape of any transitional arrangements (if they are agreed), and even the exit date (given the Parliamentary process) are potentially unknown.
While Brexit is quite a different sort of challenge, firms should be able to infer quite a lot about regulators’ response from triangulating what they did or didn’t say and do in the run up to, respectively, the Scottish referendum and the implementation of MiFID II. The essentially political nature of the former and the capacity for market turmoil with the latter are just two of the features worth exploring. Suffice to say that without the political dimension, regulators would almost certainly be communicating much more frequently and openly with the industry.
2. Managing the transition: It seems a long time ago, but back in the spring of 2017, the PRA wrote to firms about submitting their contingency plans. It’s a fair bet those original documents have been overtaken by events, and that the regulators’ own contingency planning is now as comprehensive as anything they would expect of a firm.
Like firms, the regulators will have limited resources, particularly specialist resources, to do the necessary work. And the course of the Brexit negotiations means many firms will hold off submitting applications until the last safe moment, leading to a logjam that will likely force regulators to apply an ever more severe prioritisation process.
For the PRA, this will likely mean focusing heavily on the necessary decisions around the highest impact EU firms. Other firms may need to be transitioned through with only a light review, and then looked at in more detail later. For the FCA, the impact curve will be flatter and it will be harder to identify the most important issues, creating the risk that they spread their resources too thinly.
External relationships: To pursue the MiFID II comparison a little further, in normal circumstances not only would there be much more external guidance for firms, there would also be extensive dialogue with ESMA, the EBA and EIOPA, as well as with the most relevant national regulators. Given the political situation on Brexit, it’s hard to imagine this is happening in a recognisable way.
The concern about clearing highlighted in this article is only one of a number of critical issues where the clock is ticking dangerously. Reducing these risks where possible will be a major concern for the PRA/Bank and FCA.
Firms will all have their own versions of this story, but it’s worth remembering that Brexit is one of those situations where firms and regulators are in the same boat.
Policymakers are becoming increasingly aware that cleared derivatives are one of the key risks to financial stability if there is no deal between the UK and EU. Clearing houses, largely run by exchanges, sit between parties in a deal and manage the impact to the market if one side defaults.