Britain’s main financial watchdog has warned that a hard Brexit could leave it less able to protect consumers from abuse in the financial services sector.
In a letter to the House of Commons Treasury Select Committee, Andrew Bailey, the Chief Executive of the Financial Conduct Authority, said that a transitional deal with the EU would be “important to avoid material risks” to its core function: “to seek to mitigate risks to consumer protection, market integrity and competition in the interests of consumers.”
The UK’s financial supervisory regime is closely linked to that of the EU. Were the UK to undergo a hard, “cliff-edge” Brexit with no transitional phase, the FCA say there would be “multiple issues or risks inherent” in such an approach. They warn that such a hard Brexit would create an “information gap” that could lead to “market abuse” and “operational risks.” And they say that global regulatory standards “would not provide a solution to the shorter-term challenges around the UK’s withdrawal from the EU.”
Andrew Bailey suggests in the letter that an appropriate transition phase could take up to ten years, which is the timescale that has been used for major EU regulatory changes, such as the Solvency II package, in the past.
Commenting, Chris Leslie MP, leading supporter of Open Britain, said:
"The last thing post-Brexit Britain needs is to tie the hands of the Financial Conduct Authority behind their back. A hard Brexit doesn't just risk pushing our economy over a cliff edge, it risks throwing robust regulation into the void as well.
"If we learnt anything from the 2008 global economic crash, it is that a clear system of regulation for financial services is essential. It is deeply worrying that the people responsible for that in this country are saying they will not be able to do their job properly if Britain crashes out of the EU without a transitional deal in place.
"When the financial watchdog are themselves saying they will not be able to properly protect consumers following a hard Brexit, the government needs to sit up and take notice.
"If the watchdog cannot watch financial transactions properly, we are leaving both peoples' finances and markets vulnerable to abuse."
Notes to editors:
The letter from Andrew Bailey to the Treasury Select Committee, published on February 23rd, is here: http://www.parliament.uk/documents/commons-committees/treasury/Correspondence/13-01-17-Andrew-Bailey-to-Chair-re-UK's-future-economic-relationship-with-the-EU.pdf
The FCA says that transitional arrangements are “important to avoid material risks” to consumer protection, market integrity and competition in the interests of consumers.
“Our statutory objectives require us to seek to mitigate risks to consumer protection, market integrity and competition in the interests of consumers. We therefore view the risks around UK withdrawal from the EU in the context of those objectives. Hence, we believe a smooth transition will be important to avoid material risks to each of those objectives from arising by providing for an implementation period.”
The FCA says “Multiple risks” to financial services would arise from leaving with no deal if there are no transitional arrangements in place.
“There are multiple issues or risks inherent in transitioning out of the UK's existing regime, which become particularly acute in a 'cliff-edge' scenario, whereby the regulatory framework for UK financial services changes immediately and substantially on the day of EU withdrawal and there are no transitional arrangements in place.”
The “the most critical risks relate to market integrity and consumer protection.”
“From an FCA perspective, the most critical risks relate to market integrity and consumer protection, but there are also competition risks, and wider legal, operational and general market stability risks to consider.”
An example given is firms not being able to process financial service activity as passporting rights would lapse, which would lead to UK-based firms relocating.
FCA warn of an “information gap” that could lead to “market abuse” and “operational risks” if there were a cliff-edge/no deal.
“In such scenarios the FCA may, then, face operational risks in terms of the availability of important supervisory information on firms doing business in the UK. The information could, for example, relate to instances of cross-border market abuse - a real threat to our objectives - where the timely exchange of information is critical to resolve issues. As this information exchange is mutual, other EU regulators may also face risks around an information gap.”
The letter makes clear that regulatory co-operation with the EU is needed and cannot be supplemented by global standards.
“[Global regulatory standards] would not provide a solution to the shorter-term challenges around the UK's withdrawal from the EU.”
The FCA suggest the transitional period could take up to ten years.
“Within EU financial services legislation this time period ranges from six months to eight years. However, some time periods have been significantly longer, notably Solvency II which includes certain provisions allowing firms up to 10 years to adapt to the composition of capital requirements set out in the Directive, and up to 16 years to transition to a market consistent regime on the valuation of technical provisions.”
“In view of the substantial content of the letter which is not contained in any other FCA publication, I am copying it to the Chancellor of the Exchequer, the Governor of the Bank of England, the Secretary of State for Exiting the European Union and the Cabinet Secretary.”
The FCA’s website explains what it does to protect consumers: https://www.fca.org.uk/about/protecting-consumers, and to protect market integrity: https://www.fca.org.uk/about/enhancing-market-integrity