The personal finances of several millions of people in the UK and in Europe are at risk if the EU and UK not come to an agreement on cross-border contracts post-Brexit, according to a City thing tank.
According to a new report from industry body TheCityUK, citing data from the Bank of England, approximately six million UK insurance policyholders, 30 million European Economic Area (EEA) insurance policyholders, and around £26trn of outstanding uncleared derivatives contracts could potentially be affected.
When the UK leaves the single market, UK-based providers will no longer be able to rely on ‘passports’ and the right of establishment to service existing cross-border financial contracts throughout the EEA.
There will also be an identical impact on EEA providers who will be unable to service existing financial contracts with UK-based parties.
The issue of contract continuity will impact insurance, pensions, medium and long-dated derivatives contracts, and revolving credit facilities. It may also affect general customer terms of business, prime brokerage and custody arrangements.
While service providers are preparing to take steps to mitigate the impact of the loss of passporting rights, it is highly unlikely that this will be adequate to fully address the contract continuity issue by March 2019, TheCityUK said.
Some contracts simply cannot be transferred and require special regulatory intervention. Others require new entities to be set up and capitalised, a process which cannot always be completed in the time available. Moving contracts from one entity to another also requires customer interaction and clearance which will take time given the scale and number of contracts involved, it added.
Regulatory capacity is also an issue. Many European regulators will need to take on oversight of products and services they have not previously had experience with and they may need to take on more capacity and train additional personnel.
The trade body is arguing that the full range of affected cross-border contracts must be grandfathered, either for a time-limited period, or potentially until maturity.
This would protect UK and EEA policyholders and institutions and avert potential widespread financial losses.
According to Miles Celic, chief executive officer at TheCityUK, “ignoring the question of contract continuity post-Brexit is to play a dangerous game of chicken with the finances of customers across the whole of Europe”.
He said: “Without a viable solution, millions of people could be left without a safety net. This must not be sucked into the Brexit negotiations. It is a non-political, technical issue and needs a non-political, technical solution.“Continuing to be able to serve customers and clients is the industry’s number one priority. While firms are doing everything they can, this is not a problem that businesses can fix alone and requires a coordinated UK/EU approach. Without it, people and businesses across Europe could be left dangling over a cliff edge following Brexit.”
Samuel Blanning, financial adviser at Bristol-based Star House Financial Services, argued that an "insurance or a derivative contract is a private contract between two individual people or businesses, and is not affected by intergovernmental trade negotiations unless there is a specific reason for it".
He said: "It is exceptionally rare for governments to change the terms of existing private contracts retrospectively, for any reason.
"Nobody’s private insurance contracts were ripped up when we entered the EU, and nobody’s private insurance contracts will be ripped up when we leave it, regardless of what London and Brussels sort out between themselves (or don’t). The idea that Europeans’ 'personal finances could be wiped out' is utter nonsense."
In March, David Davis, the secretary of state for leaving the European Union, refused to guarantee financial services will be able to operate on at least the same terms after Brexit as it does now.
However, as FTAdviser previously reported, the Financial Conduct Authority (FCA) has already said the UK leaving the EU will not lead to a dramatic scaling back of its regulation as a method of attracting new business to the UK.
maria.espadinha@ft.com
