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Guide to regulation
BrexitSep 26 2019

How can businesses prepare for Brexit uncertainties?

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How can businesses prepare for Brexit uncertainties?

It has been reminding companies of their obligations while trying to reassure them as well.

Andrew Bailey, FCA chief executive, recently said: “We will take a pragmatic approach to issues as they arise. 

“We will use forbearance generously but appropriately, to maintain market integrity and protect consumers and market uses.”

The FCA expects all companies to plan for all scenarios, including a no-deal Brexit.

Location a factor

Regulation experts say Brexit is unlikely to have an immediate impact on regulation in the UK. But over time that could change. 

In the immediate term, if there is no deal, passporting will end on the day the UK leaves the EU.

Companies spoken to by Financial Adviser stress they have done the necessary preparations, particularly when it comes to the onshoring of EU regulation and transitional arrangements.

But how Brexit might impact a company will depend on where it is located and the services it undertakes – a bigger issue for fund managers.

Don Scott, technical director at compliance firm TCC, says: “Firms in the EU wanting to access UK customers will need to be part of the temporary permissions regime.

“UK firms that want to access EU customers will either need to have a physical presence in the EU or may be able to use transitional arrangements to access customers.  

Key points

  • Location of business and service provided will determine level of impact
  • Brexit uncertainty could lead to rule-divergence between UK and EU
  • A poorer UK economy is biggest concern for IFAs

“However, for the provision of retail advice, much of the transitional arrangements are piecemeal and will differ from EU country to EU country.”

As we get closer to October 31, the likelihood of a no-deal Brexit increases.

The FCA is unlikely to change tack on existing rules before October 31. But afterwards, the direction may be influenced by a deal with the EU or the absence of a deal, Mr Scott adds.

When it comes to in-flight legislation – EU legislation which may be adopted by the UK two years after we leave – it is dependent on the Financial Services Bill being passed by 31 October. 

Mr Scott says: “This timeline is now in doubt because parliament has been prorogued. This means there could be divergence in rules going forward, which will be difficult for firms operating cross-border.”

The big pieces of EU legislation that have already been introduced include GDPR, Mifid II and IDD.

Mifid II allows for reverse solicitation rules for existing customers, but this is subject to national regulator discretion and could vary from country to country. 

Mr Scott says: “Therefore firms need to consider if advising cross-border has any potential legal implications. UK firms servicing UK customers will need to comply with UK FCA requirements.”

The FCA adds: “We will provide transitional relief to enable firms to adjust to new requirements. But in some areas, such as Mifid II transaction reporting, we will not apply this relief and you must take reasonable steps to be ready by 31 October 2019. If your firm is not ready to meet these obligations in full, we will expect to see evidence why this was not possible.”

Mr Scott says it is impossible to determine what the future might hold in relation to rule application.

He adds: “Brexit is a political phenomenon, which has regulatory implications. The framework is changing and therefore regulators will need to respond accordingly.

“There is the potential the UK may diverge from current EU regulation, but this will impact the question of equivalence with Mifid and other regulations. This is the balancing act the FCA and policy makers will need to consider, and firms will need to respond in relation to their own customer plans.”

Echoing his thoughts, independent consultant Rory Percival adds: “Clearly there is scope to diverge from the existing EU-based rules.  

“However, I strongly suspect there will be a standard FCA policy-making process to assess when considering new policy – the implications for cross-border trade of any differences with EU regulation, for example, whether there is any scope for firms to benefit unfairly from regulatory arbitrage.  

“Similarly, I think the FCA will keep a close eye on developing EU regulation for the same reason and whether it wants to replicate.”

Advisers will have been busy implementing their contingency plans where relevant.

Scott Gallacher, managing director at Rowley Turton, says: “Our assessment is that Brexit should have little or no direct impact on our business, as we deal with UK resident clients who do not hold passporting rights. That said, there is the concern about the unknown and unexpected impacts.

“Unfortunately there is actually very little practical information out there about the possible impacts, and this probably isn’t helped by the uncertainty around when, or if, Brexit will happen and what form it will take.”

But Mr Gallacher believes the greatest concern to advisers is if the worst economic predictions around Brexit come true, such as a significant hit to the UK’s GDP.

He adds: “If the country is poorer, people will have less money to save or invest, and that may lead to some impact on the advisory market as a whole.”

Dr Matthew Connell, Chartered Insurance Institute director of policy and engagement, says the uncertainty is a reminder of the value of advisers who should already be speaking to clients and managing their levels of expectation.

He adds: “Advisers have had a few dress rehearsals. The outcome of the referendum produced a very strong reaction from the markets over the short term.

“Advisers have already had an opportunity to talk to clients about their portfolio, and certainly in terms of where investments and pensions sit, advisers will always be looking to make sure their clients have access to liquid rainy day funds and income.”

Mortgages and pensions

In the mortgages market, UK Finance says it does not expect any issues for UK residents with property in Europe purchased with a loan from a UK-based bank. 

For UK-residents with a mortgage from an EEA-based lender on an EEA-based property, the ability to continue servicing that mortgage will depend on the position taken by the lender. 

David Hollingworth, associate director at London and Country, says he does not expect to see any move to make changes to existing portfolios in a market that is already highly regulated.

Following the Brexit vote, there was a major concern over pension payments to customers outside of the UK and vice versa.

The Association of British Insurers says it has done “everything possible” to prepare for no deal, including transferring an estimated 29m insurance contracts and the establishment of nearly 40 EU subsidiaries and branches to minimise disruption to customers. 

Longer-term, the UK’s position with Europe may be one of seeking ongoing equivalence with EU regulation to minimise barriers to trade with the EU bloc or towards deregulation in order to increase the UK’s competitiveness worldwide. 

The chosen path will depend both on the terms of Brexit and also the political landscape within the UK in the years following Brexit.

Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser.com