FCA: Brexit Draft Agreement Preferable to No Deal

The British regulator says Theresa May's plans will mitigate cliff-edge risks

The Financial Conduct Authority (FCA) released a document this Thursday which assesses the UK’s prospective departure from the European Union (EU). As with all Brexit documents, there are a lot of potential outcomes and few certainties.

In its paper, the British regulator looked at three Brexit focal points pertaining to the financial services industry. Firstly, the potential of a no-deal Brexit is examined, followed by an analysis of could happen if Prime Minister Theresa May’s draft agreement is accepted. Finally, the document looks at future relations between the UK and the EU.

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With regard to a no-deal scenario, most of the regulator’s comments should make for old news for our readers. If the UK and EU cannot agree, the market access of the former to the latter will be determined by World Trade Organisation rules.

On top of that, EU legislation will cease to apply in Great Britain. But, as a parting gift, the EU will shift all relevant laws on to the UK’s legal books and, once Brexit occurs, all of them will become a part of British law.

Finally, passporting rights for British firms operating in the EU – and vice versa – will cease to apply. The UK will also be excluded from the existing data sharing agreements between EU countries.

Though the regulator said that there could be some disruption to consumers in the wake of a no-deal Brexit, it also said that it expects the UK’s financial services industry to be resilient if such a scenario occurs.

“Ultimately,” said the regulator, “the impact of a no-deal scenario greatly depends on the extent to which the UK and EU can continue to cooperate and take action together to minimise disruption.”

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Accepting the draft agreement

Having looked at the potential outcomes of a no deal first, the regulator then turned to look at what will occur if the UK parliament approves the draft agreement proposed by May.

The regulator appears to be supportive of the agreement. Noting that it has consistently opposed a Brexit that will inflict cliff-edge risks on the financial services industry, the regulator claims that May’s draft proposal, by implementing a transition period of sorts that will run from 30 March 2019 to 31 December 2020, will prevent those risks from occurring.

“For the FCA, the risks presented in [a transition period] are preferable to the risks of a no-deal scenario,” said the regulator. “As the implementation period is extendable for up to two years by agreement between the UK and the EU, this could assist in helping
to avoid further cliff-edge risks at the end of the period.”

More notably, the regulator said that during that transition period or, as it calls it, ‘implementation period,’ the FCA will have no say in the development of new regulation by the European Securities and Markets Authority (ESMA).

Having said this, the regulator did point out that there is still time for this to change and that the regulator could make a deal with ESMA that will see it gaining influence in the EU regulator’s decision-making process.

At the same time, the FCA also noted that there are currently 30 EU laws under discussion that the British regulator would have to implement if they were ratified by the end of the implementation period.

FCA and ESMA – hand in hand

Finally, the regulator laid out some points regarding the state of future relations between the FCA and EU regulators. As these are fairly straightforward, and the regulator was kind enough to put them in bullet point form, we can quote them in full here:

  • commitments to preserve financial stability, market integrity, investor
    protection and fair competition, while respecting each parties’ autonomy
    and ability to take equivalence decisions in their own interest;
  • commencement of equivalence assessments by both parties as soon as
    possible after UK withdrawal, endeavoring to conclude these assessments
    before the end of June 2020; and
  • close and structured cooperation on regulatory and supervisory matters,
    grounded in the economic partnership and based on the principles of
    regulatory autonomy, transparency, and stability

The obsession with finding common ground with the EU of courses begs the question, “aren’t we supposed to be leaving this organisation?” But, not wanting to descend into ranting controversy, we shall have to leave that conversation for another time.

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