FCA published a report on impact assessment of the withdrawal of UK from EU. The report sets out the impact of the Withdrawal Agreement and future framework on the objectives of FCA, as requested by the Treasury Select Committee. FCA also published a letter from Andrew Bailey, its Chief Executive, written to Rt Hon Nicky Morgan MP, Chair of the Treasury Select Committee. The letter highlights the key points related to the impact assessment.
In line with the Treasury Select Committee’s request, FCA focused its analysis on the following three areas:
- No Withdrawal Agreement is finalized by March 29, 2019 or no future relationship is in place at the end of the implementation period
- The draft Withdrawal Agreement is agreed
- The future relationship is in place by December 31, 2020
The report states that impact of a no-deal scenario greatly depends on the extent to which UK and EU can continue to cooperate and take action together to minimize disruption. The government, FCA, and BoE/PRA have taken steps to ensure that appropriate mitigation is in place for risks that can be dealt with unilaterally. Alternatively, in the event a Withdrawal Agreement is ratified but no future relationship is in place before the end of 2020, and absent any other agreement for financial services, or an extension of the implementation period, UK would leave EU with no specific framework in place governing its relationship the EU. FCA expects, in this scenario, firms would have had more time to prepare for such an outcome; therefore, the risks specifically for the financial sector would be lower than had UK left without an agreement in March 2019. However, some of the cliff-edge risks are dependent on actions taken by the EU. While UK and EU may have had more time to coordinate their approaches to dealing with such risks, it is not possible to rule out that at the end of the implementation period new cliff-edge risks could arise.
The draft Withdrawal Agreement provides for an implementation period, which will run from March 30, 2019 to December 31, 2020, during which EU law applies to UK. The implementation period may be extended once with both parties’ mutual consent. FCA has consistently supported an implementation period to avoid cliff-edge risks and smooth UK’s transition to a new relationship with EU. The draft Withdrawal Agreement achieves this by ensuring that EU law, and rights and obligations derived from EU law, continue to apply throughout the period. This includes new EU laws that are agreed and implemented during that period. For FCA, the risks presented in an implementation period are preferable to the risks of a no-deal scenario. As the implementation period is extendable for up to two years by agreement between UK and EU, this could assist in helping to avoid further cliff-edge risks at the end of the period. However, it will be important to consider the risks associated with any extension and to work during the period to avoid new cliff-edge risks arising.
At the end of the implementation period, UK and EU are expected to have an agreed future trading relationship in place. The government and EU have agreed an outline of the political declaration, setting out the framework for the future relationship between EU and UK. The UK and EU will both have the ability and common interest to find each other’s regimes equivalent post exit, facilitating market access across a range of sectors. The declaration appropriately recognizes that this must be in the context of both sides retaining autonomy over the exercise of their equivalence regimes. Therefore, equivalence assessments will need to be based on equivalence of outcomes, as opposed to identical rulebooks. FCA believes that there is a substantial scope for development and improvement of the framework.
Keywords: Europe, EU, UK, Banking, Insurance, Securities, Brexit, EU Withdrawal Impact Assessment, Withdrawal Agreement, BoE, PRA, FCA
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