BrexitAug 9 2017

Regulator sets out Brexit risks

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Regulator sets out Brexit risks
ByMaria Espadinha

The Bank of England’s Prudential Regulation Authority (PRA) has received Brexit contingency plans from 401 banks, investment firms and insurance companies.

Sam Woods, chief executive of the PRA, disclosed the figures in reply to a 24 July letter from Nicky Morgan MP, new chairman of the Treasury select committee, asking for an update on his progress in monitoring banks' Brexit preparations.

Mr Woods said the PRA is now analysing the responses in detail, both the “individual plans, to ensure that each firm undertakes sufficient preparations, and firms' plans collectively, to identify whether there are broader financial stability risks which could arise from the collective execution of the contingency plans.”

The bank's financial policy and prudential regulation committees are expected to submit their views on the topic in the autumn.

Nevertheless, Mr Woods has already identified four risks that could arise for firms if the UK leaves the European Union in March 2019 without an exit agreement. 

“The fragmentation of market-based finance could result in higher costs resulting in less activity, particularly in relation to the hedging of risk, which could result in risks for both the EU and the UK,” he noted.

There is also “the possibility, in some scenarios, of a broader disruption to the UK real economy that could test the resilience of the financial system,” he stated.

Secondly, Mr Woods said there could be underlining issues with the “continued servicing and performance of existing contracts and restrictions on data transfers.

"We are engaging further with firms and trade bodies to examine the possible mitigants to these risks and determine which are likely to be most effective.”

Mr Woods also pointed out that firms restructuring to mitigate risks to their business will in general increase complexity.

In particular in relation to 'outbound' firms, “restructurings will in many cases result in strongly inter-connected entities between the UK and the EU,” he noted.

Finally, Mr Woods acknowledged that the PRA itself might also face "a material extra burden on resources" by having to authorise and then supervise a significant number of additional firms.

For Tom Selby, senior analyst at AJ Bell, "the dislocation of the UK from the European Union clearly has profound implications across the economy, but particularly financial services where the UK is a world leader.

There is also, as the PRA notes, the risk that a so-called ‘hard’ Brexit sparks a loss of confidence in the UK economy."

Mr Selby argued that "the aim of political leaders should be ensuring the process is completed as smoothly as possible, minimising disruption to businesses and consumers."

For advisers and clients, however, "a lot of this will simply be background noise and thus, for the most part, ignored," Mr Selvy said. 

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