As the U.K triggers Article 50 for starting the process to exit the European Union (E.U), the Prudential Regulatory Authority (PRA) issued a letter to all financial services firms with E.U cross border activity to submit contingency plans for Brexit.
The PRA aims to ensure that all firms plan for a full range of possible scenarios to mitigate the risk of any financial instability on the U.K economy. The letter notes that many firms are ‘well advanced in their planning’ but this is uneven across firms as some do not go far enough to test against more severe possibilities, such as the impact of there being no trade agreement between the U.K and the E.U upon exit.
The PRA states firms should develop contingency plans to seek application from the PRA to operate in the UK, for firms currently using passporting arrangements who undertake business in the U.K. If the U.K does not obtain market access to the E.U, firms would lose the ability to offer some cross border regulated services. Thus, planning should include seeking authorisation and for possible structural changes e.g. creating a subsidiary.
We briefly examine what other areas should be considered during planning even though terms are being negotiated during this transition period.
Early communication with regulators
Firms should develop a plan of communication with regulators and supervisors during this transition period for informal conversations focusing on authorisations and internal models. This plan can assist in the progress of interactions as firms can expect regulators and supervisors to be inundated with requests during this period.
Contingency plans need to consider the possibility of restrictions on employment from the EEA. There is currently no agreement on EEA nationals who currently work in the U.K, for them to continue working without restrictions post Brexit. Considerations such as: applying for U.K nationality (for which there are restrictions such as time); E.U Blue Card (offered to highly skilled workers earning above a certain threshold), among other scenarios should be planned for.
This is required as so much is still being negotiated. Analysis should be undertaken on what impact there could be on clients as well.
Plans should also include dialogues with employees, investors and customers to keep them apprised with developments.
Internal audit can add value to this planning process by testing the robustness of their plan and ensuring that there has been the right level of discussions at various levels in the organisation. Their expertise in being professionally sceptical and ‘thinking outside the box’ can ensure that adverse possibilities have been planned for.
Dhallu & Co. and the author will not be liable for any reliance you place on the information in this publication. You should seek independent advice.