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Brexit: UK regulator warns on derivatives, reassures on passporting

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The UK’s financial regulator has called for action from its European counterparts to help avoid significant detriment to markets and consumers as the UK leaves the European Union.

As much as £26trn (€29trn) worth of derivatives contracts could be negatively affected by Brexit, according to Nausicaa Delfas, the Financial Conduct Authority’s (FCA) executive director of international. Such disruption could hurt insurers and pension funds employing liability-driven investment strategies.

Speaking at a Bloomberg event in London yesterday, Delfas called for cooperation between EU and UK regulators to allow such assets to continue trading.

“If this is not achieved, there is a risk that some of these contracts could not be appropriately serviced,” she said. “In concrete terms, insurers may not be permitted to pay out claims on policies, and derivatives users may not be able to manage the risks of their positions.”

Delfas said a “bilateral solution” in cooperation with the EU “would be preferable”. The FCA was taking part in a group set up by the Bank of England and the European Central Bank to discuss risks related to Brexit, including contract continuity, she added.

Nausicaa Delfas, FCA

Nausicaa Delfas, executive director of international, FCA

The UK is scheduled to end its EU membership on 29 March 2019. Although it has yet to be formally agreed, a transition period has been proposed, lasting through to the end of 2020, during which time UK laws will remain in harmony with those of the EU.

The FCA expected UK and EU markets to “remain highly integrated whatever the outcome of Brexit”, Delfas said.

“We think working to promote common global standards, alongside our work to onshore a rulebook that is equivalent to the EU on day one, provides a solid basis for cross-border business to take place,” she added.

Firm expectations

Many of the 58,000 companies regulated by the FCA were making good progress with their contingency planning, Delfas said. However, she urged providers to consider a variety of measures to “ensure a successful transition”.

In particular, Delfas said companies shifting operations out of the UK and into Europe should ensure that the UK entity still had sufficient senior staff and were able to meet regulatory standards.

“We expect you to continue to service your customers as fully and fairly as the law permits, and to communicate with affected customers, in the UK and elsewhere, in a clear and timely fashion, including, for example, what regulatory protections will apply for your customers,” she said.

Temporary permissions

The regulator yesterday published a statement outlining the areas it wanted UK firms with European clients to consider, as well as a proposed “temporary permissions regime” for providers based in the European Economic Area (EEA) and serving UK-based clients.

Such a regime would, if used, allow EEA companies to keep operating in the UK “for a period of time after the exit day”, the FCA said.

Companies would still need to seek full authorisation for longer-term operations, but there was no need to apply for this yet, the regulator said.

The FCA has also been analysing the EU financial rulebook in anticipation of regulatory divergence over time, Delfas said. The authority has reviewed in detail roughly 50 pieces of EU financial services legislation, and 185 technical standards and will consult on changes in the next few months.

The UK has already agreed to implement a regulatory equivalence approach from 29 March next year, meaning there would be no immediate changes to rules for firms operating into or out of the UK.

“Neither the UK nor the EU wants to see a significant misalignment in regulatory standards – nor indeed ‘a race to the bottom’ in regulatory standards,” Delfas said. “But it is likely that after our exit from the EU, our regulatory frameworks may evolve.  So we need to find a way to ensure that despite such evolution, frameworks allow delivery of common outcomes.”

In a white paper last week outlining its approach to Brexit, the UK government set out its intention to run rules in parallel on an “outcomes basis” – essentially meaning rules may differ but the objective would be the same.

Delfas said: “What matters more is not what road we take, but what that final destination is – and as long as the UK and the EU maintain a commitment to protecting consumers and to strong, open markets, there is no reason this cannot work in practice.

“This is a clearly achievable aim. Not least because it is overwhelmingly in the interests of both the UK and EU: it is in the interests of UK and EU consumers; it is in the interests of UK and EU firms; it is in the interests of UK and EU markets.

“We hope that we can see progress on this in the very near future.”

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  • Nausicaa Delfas, FCA

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