In the early days of 2018, Brexit looked relatively optimistic. A deal appeared to be in the works and a transition period had been agreed.

Fast forward to today, and ‘Operation Yellowhammer’ No-Deal contingency plans are being prepared by the cabinet. The UK Government published a series of technical notices on 23 August to outline the impact of exiting the European Union without a deal, and the survival of the Cheques plan itself is uncertain with no viable replacement in sight.

As negotiations enter the final stage for the UK and the EU27, Capco is already helping firms to prepare for the event of a ‘no-deal’ Brexit using our teams and specialists across Europe.

The ‘No-Deal’ notice for Financial Services

The treasury department published guidance for firms and consumers in a technical notice for Financial Services. The notice covered a range of issues and impacts from consumer spending to clearing:

• Card payment costs are expected to rise, due to lack of direct access to central payments infrastructure under TARGET2 and loss of the surcharging ban
• A re-emphasis on the unilateral action undertaken by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to guarantee the position of EU27 financial services firms in the UK
• Operational challenges including the service provisioning of OTC derivatives contracts as well as various trade lifecycle events

The challenges are not new. They have been emphasised repeatedly across the industry even prior to the referendum on EU membership in June 2016, and it is telling that they remain challenges today.

Unilateralism without reciprocation: The FCA, PRA and EBA

For financial services firms, an important area to focus on lies in the continued discrepancy of regulatory positions between the FCA, PRA and the EBA.

In March 2018, the PRA brought into force its approach to continued supervision of international wholesale banking service providers in the UK, seen as primarily directed at the EU27, as laid out in PS3/18, and assuring firms that UK authorisation would only be needed at the end of the transition period.

Similarly, the FCA confirmed that the UK Government would commit to a temporary permissions regime as a backstop, removing the need for EU27 firms currently benefitting from a passport to apply for new authorisations, and instead simply registering for a transitional status.

By contrast, the EBA in June 2018 continued to warn firms of ‘inadequate’ preparation for Brexit and has required full applications for licenses to continue activity in the EU27 post-Brexit, with no reference to the transitional period. There is repeated emphasis on an exit “without a ratified withdrawal agreement”, a strong indication of the scenario that the EBA is planning for.

Most tellingly, the EBA did not reference at any point the temporary permissions regime announced by the FCA. This is a stark contrast in regulatory positions between the two sides and should be a significant concern for FS.

The Capco perspective 7 months out

Despite various assurances on progress, with 7 months to go until ‘Brexit Day’ a no-deal scenario has become more likely. While Brexit Secretary, Dominic Raab and Chief Negotiator, Michel Barnier have pledged to accelerate negotiations to reach a deal, unique challenges make the path to such a deal unclear.

The unofficial expectation now is a deal by mid-November 2018, and even that is uncertain. It will take more time for details and specific actions for financial services to filter through, leaving at best 5 months to enact resulting plans for the original March 2019 deadline.

While financial services firms should already be well underway with Brexit plan implementation, Capco believes that the risk of a ‘no-deal’ scenario and significantly different regulatory positions between the UK and the EU emphasises the need to be prepared for the least favourable outcome.

There will simply be no time to adapt if firms do not act now, as any deal is likely to appear at the last minute. As the options for contingency and scenario planning become increasingly narrow, tactical planning and decisive action will come to the fore – areas that Capco can provide full support and help organisations maximise the benefits of transition.

Find out more about how Capco’s Brexit Toolkit can help you to be ready ahead of March 2019.