The Treasury select committee required the UK regulator to assess the affect of Brexit across three areas: leaving without an agreement either on 29 March 2019 or at the end of the implementation period on 31 December 2020; implementation of the withdrawal agreement; and the outline of the political declaration on the frame for the future relationship between the EU and the UK.
The FCA’s resulting withdrawal impact assessment was published online on Thursday.
Factors beyond FCA control
Regarding a no deal Brexit, the FCA says it has taken all unilateral steps possible to mitigate disruption from ahead of the Article 50 deadline on 29 March 2019, but said there were a number of issues dependent on actions from the EU. These included:
• the extent to which the EU and UK are able to treat each other’s regulations as equivalent, including for the purposes of sharing data;
• the extent of supervisory cooperation and how regulators would manage the separation of shared systems for market oversight; and
• the solutions the EU puts in place to ensure continuity of contracts and other cliff-edge risks the Financial Policy Committee (FPC) has identified
Another cliff-edge could arise at the end of 2020 if a withdrawal agreement is ratified but not future agreement is in place at that date. While the FCA said in this scenario there would be more time for the UK and EU to coordination to deal with risks, it said it was not possible to rule out that new cliff-edge risks could arise at the end of the period.
If the UK leaves the EU without an agreement in either 2019 or beyond, the FCA said passporting rights would cease to apply. Additionally, execution of firm contingency plans could lead to market fragmentation and increase cross border risk. Drawing on the work of the financial policy committee, the regulator said market volatility would rise but the UK financial system would remain resilient.
Risks of extension of implementation period
The FCA said it has consistently supported an implementation period to avoid cliff-edge risks and smooth the UK’s transition to a new relationship with the EU.
However, it noted there are 30 EU legislative files relating to financial services are currently under discussion and that it is not clear how many of these would need to put in place during an implementation period.
An extension of the implementation period could increase the risk of the UK having to introduce new European rules before its exit, the report said. The FCA would engage with European partners on the matter “but the amount of influence we can have is uncertain”, it said.
However, it acknowledged a two-year extension of the implementation period could reduce cliff-edge risks.