How to prepare for Brexit

As a result, much of the wealth industry is inert, unwilling to commit to the implementation of their Brexit contingency planning until the future of the UK’s financial services regulation becomes clearer.

Plenty of businesses will have begun indicating their plans to clients and will know the value of the potential business they stand to lose if contingency plans for a worst-case scenario are not executed once Brexit’s outcome materialises.

Although sitting tight might seem the most logical option, it does not mean wealth managers and advisers have to stick their heads in the sand and wait for the political clouds to clear.

Finding exemptions

Irrespective of the negotiations’ outcome, wealth managers will still have to evidence to the Financial Conduct Authority how they have acted and communicated through this uncertainty in the best interests of their clients.

Wealth managers will still have to evidence to the Financial Conduct Authority how they have acted and communicated through this uncertainty

The FCA has conceded that it will not take a strict liability approach, and that they do not intend to take enforcement measures straight away, so long as companies can evidence they have taken reasonable steps to prepare to meet their obligations by March 30.

However, this should not lull companies into a false sense of security – the priority to evidence that you have carefully considered what steps you need to take and have prepared to meet new obligations come March 30 should not be underestimated.

Key Points

• While preparing for Brexit, companies should not forget their ongoing duties
• It is important to evidence steps you have taken
• Independent financial advisers should see if their clients are EU27-only

Accordingly, a separate EU27 authorisation continues to be the golden ticket to future-proofing against all post-Brexit scenarios. Without regulatory approvals in place, companies should look at the exemptions that could be available to them for those at-risk clients.

Wealth managers can also look to see if any of the EU27 states that they operate in have announced whether they intend to introduce temporary measures or transitional relief to prepare for the UK’s withdrawal.

While this approach provides a continuity of service, it is not a silver bullet.

Understanding the technical limitations to what exemptions allow a business to do will inform transparent client communications and help assess the underlying uncertainty that not all exemptions are permanent.

If there is no exemption available, the risk is obvious: companies may no longer be able to service the business and, in the event of a loss of passporting, the cessation of business with these EU27 clients is the only option.

Companies are beholden to themselves to explore these options and determine their risk appetite and whether to cut their losses.

The relationship test

A root-and-branch analysis of companies’ EU27 customers will show vulnerabilities and allow management teams to map the gaps that need to be filled.

Companies could do well reviewing whether their clients are EU27-only. Given the heritage of the industry, it is unusual for clients to not have some sort of affiliation with the home country in which their provider is based, that is, the UK.

So, while clients may have an address in an EU27 country, further due diligence may reveal clients do maintain a residence in the UK and a basis to continue to service them.

Engaging clients early to have an honest discussion about their options and challenging the personal data a company has on file for clients at face value will help foster a deeper mutual relationship.

Indeed, a proven UK address may circumvent the location headache and bring greater continuity of service.

In turn, this not only proves to the regulator that clients’ best interests are accounted for, but it also brings a relationship manager much closer to their client – one of the positive unintended consequences of Brexit contingency planning.

Do not forget about business as usual

Wealth managers must not forget their day-to-day and ongoing reporting responsibilities.

They should consider what it would look like from an operational perspective if they got authorisation in the EU.

As companies are reporting to different regulators, there is also potential discrepancy over whether the regulator accepts their reporting, a good example being transactional reporting, in the same way. 

That is already evidenced with the FCA confirming that companies should see very little change in the reporting mechanics under Mifid II, but it will replace the European Securities and Markets Authority’s Financial Instruments Reference Data System with a UK version.  

While the UK is Mifid II compliant, a hard or no-deal Brexit would challenge the transparency objectives in Mifid II, which in turn may require a much-rumoured rewrite of some of the rules and would also mean that the UK no longer has an official seat at the table for when they are formulating the regulation.

There could well be disparities in the areas that the rumoured Mifid III will focus on, which UK companies will have to consider.

Making foes your friend

If they have not already, then companies need to start examining where they have existing relationships with third-party service providers or even competitors in EU27 jurisdictions that would help hedge against the Brexit compliance burden.

The wave of structural change is already evident across the industry, and an increase in joint ventures and complementary mergers is likely – particularly if it satisfies authorisation, business continuity and reporting requirements.

While this explains the inertia over implementing contingency planning, companies should do their best to manage Brexit compliance as an effect of longer-term operational resiliency, and not just a driver of a company trying to paper over the potential cracks in the short term.

This could be a good thing for clients, depending on who the company is partnering with and what both parties bring to the table – such as exposure to a different asset class or more sophisticated systems.

Companies should also look at their range of services separately, considering if it is appropriate to have exposure to a wider service model in different entities.

If a company has not already made an application with an overseas regulator for that golden ticket and does not have assurance or authorisation at this stage, then it is a case of hedging your bets.

Exemptions will provide temporary relief to such an unprecedented regulatory headache, but it is not a long-term fix.

Here, looking well beyond March 30 will inform a longer-term approach to compliance risk.

Linda Gibson is director of regulatory change and compliance risk at BNY Mellon’s Pershing