FCA assesses impact of EU Withdrawal Agreement

The Financial Conduct Authority (FCA) has published its EU Withdrawal Impact Assessment, which was requested by the Treasury Select Committee and sets out the impact of the Withdrawal Agreement and future framework on the FCA's objectives. Andrew Bailey, FCA Chief Executive, has also written to Nicky Morgan MP, Chair of the Treasury Select Committee.

The Treasury Select Committee requested the FCA to assess the impact of the UK's exit from the EU in three areas:

• the UK leaving the EU without an agreement, either on 29 March 2019 or after the transitional or implementation period on 31 December 2020

• the draft Withdrawal Agreement

• the outline of the political declaration on the framework for the future relationship between the EU and the UK

Risks of exiting the EU with no deal

The FCA notes that it takes no view on Brexit, nor does it advocate a particular approach to the withdrawal from the EU. However, it says that exiting with no deal would create 'significant challenges and risks' in terms of firms' readiness, potential market disruption and insufficient public policy solutions put in place by the EU. The FCA therefore strongly supports an implementation period, though it recommends that the duration of the period should be kept to a minimum in order to minimise uncertainty.

The FCA categorises the key consequences of exit without a Withdrawal Agreement into the following areas:

• EU rules cease to apply—the relevant legislation will need to be converted into UK law, with changes to ensure it operates in a UK context

• loss of passporting—while passporting could partially be replaced by equivalence, the FCA's assumption based on the position of the European Commission is that there would not be blanket equivalence decisions that allow for current market access to continue

• the UK and EU's ability to share data may be restricted without reciprocal action by UK and EU authorities

• the FCA has regular supervisory contact with larger firms to ensure they either have contingency plans in place or have decided not to continue to offer services in the EU

• the UK's current regulatory and supervisory cooperation with EU and national authorities under EU law would cease to apply, and the UK would need to rely on the existing third country framework for cooperation instead

• the wider economic situation following exit will have both direct and indirect consequences on the FCA's objectives

The FCA notes that around 70 statutory instruments relevant to financial services and the FCA's objectives are planned under the EU (Withdrawal) Act. The FCA will also need to consult on amendments to 27 of the sourcebooks in the FCA Handbook.

In addition, 359,953 total passports into and out of the UK are currently used by 13,484 firms to do business into or out of the UK. When the UK leaves the EU, these passporting rights will cease to apply. More than 1,300 firms and funds have responded to an FCA survey indicating they will want to receive a temporary permission.

The FCA also highlights the consequences that the loss of passporting could have for outstanding cross-border contracts. After Brexit, firms may need to get local authorisation to service these contracts. The FCA's analysis to date suggests the impact is most significant in the insurance, uncleared OTC derivative and cleared derivative markets. There are also potential risks to financial stability and consumer protection – in particular in the EU—if firms cannot service these contracts.

The FCA's mandate also includes competition enforcement powers in relation to financial servies, including powers to investigate suspected breaches of the prohibitions against anti-competitive agreements and abuse of a dominant position contained in the Competition Act 1998. In the event of a no deal Brexit, the government's proposed framework gives UK competition authorities such as the FCA discretion to conduct investigations into potential breaches of the domestic competition law prohibitions under the Act that occurred before or after exit day. The framework provides that the power would be limited to the UK aspects of any potential breaches.

The FCA would exercise its discretion in accordance with its published prioritisation criteria for Competition Act cases. Ideally there would be co-operation betwen UK and EU competition authorities post-exit.

The draft Withdrawal Agreement

According to the FCA, supervisory cooperation between EU and UK authorities will be important to ensure the continuous oversight of firms. The draft Withdrawal Agreement provides for this cooperation to continue, and the FCA says that it hopes that the organisational arrangements take the form of continuing current practices.

Despite the benefits of avoiding cliff-edge risks and providing for continued cooperation, the Withdrawal Agreement also presents some challenges, the FCA says. In particular, the UK may be subject to new rules without having a say in their formulation. The FCA says that it will try to continue to engage closely with EU authorities during the implementation period, but it is uncertain how much influence it will have.

Currently, more than 30 EU legislative files relating to financial services are under discussion, some of may need to be put into place during the implementation period. A list of EU financial services legislation has been attached as an annex to the FCA's impact assessment, divided into files that are certain to come into force during that period, legislation that may not come into force and legislation that is unlikely to engage the FCA's objectives.

The future relationship

The FCA also calls for an agreement on the future relationship between the UK and EU to be concluded as soon as possible, to avoid further cliff-edge risks at the end of the implementation period.

Beyond the implementation period, the FCA expects that the UK and EU would have the autonomy to set their own rules. It welcomes the commitment in the agreement to work towards reciprocal equivalence agreements and to conclude equivalence assessments in good time before the end of the implementation period. It also welcomes the commitment for transparency and consultation in the adoption, suspension and withdrawal of equivalence decisions and information exchange, though further work on the detail is needed.

Sources:

Press release: Statement on EU Withdrawal Impact Assessment

Publication: EU Withdrawal Impact Assessment

Publication: FCA letter to Nicky Morgan MP, Chair of the Treasury Select Committee

Area of Interest