No Deal scenario - banking and financial services

A look at the government’s plans for the financial services if we get no deal with the EU.

Key points

  • This document seems to be primarily targeted at financial services firms, not consumers (although there is a section for “individuals and business customers”). Much of the content is about trading, asset management, and other activity between financial services firms.
  • For UK customers of UK-based firms, “No Deal” Brexit will lead to few significant changes.
  • For UK customers of firms based in other EEA countries, there should be few significant changes, because the firms will be invited to participate in the “Temporary Permissions Regime”, to allow a smooth transition.
  • In the event of “No Deal”, UK citizens resident in the EEA (and other EEA residents) who use UK based firms could in theory lose access to the services currently provided, unless the firm takes action. All the largest banks seem to have set up or be in the process of setting up subsidiaries which are authorised in another EU country, so there should be few changes on this front.
  • UK citizens resident in the EEA who use services from firms based in other EEA countries will see no change in the event of “No Deal”
  • “If action by customers is needed, then firms should communicate this to their customers at an appropriate time.”

Background

What are financial services?

Financial services companies help people and businesses to manage money. This includes providing normal banking and related services (e.g. current and savings accounts, mortgages and other loans along with credit cards, …) as well as other things like pensions, investments, insurance and even trading on the stock markets. Some companies (like the big four - HSBC, Lloyds, RBS, Barclays) provide a wide range of services and others provide a more limited range of specialised services.

Why are financial services important?

Moving money around and providing financial services is important to help economies function, so that people can make payments efficiently and on time, and so that individuals and businesses have enough money to meet future obligations or risks. (This is why governments did so much in the banking crisis.)

What is passporting?

The EU aims to have an integrated market, so that any business can provide their goods or services to all EU consumers, no matter which country they are in. However, in order to protect consumers, financial services firms have to be “authorised” by the national regulator before offering services to consumers in that country. Gaining authorisation from lots of national regulators would be slow and bureaucratic, so once a firm has been authorised to provide a financial service in one country, it can “passport” its authorisation into other EU countries. To do so, it simply has to inform the national regulator that it has already been authorised in a different country and intends to start offering the service in that country too.

Overview of the current situation

  • “The majority of the UK’s financial services legislation currently derives from EU law.”
  • The government is “onshoring” these rules through the European Union (Withdrawal) Act 2018 (lots of statutory instruments).
  • Certain firms, such as Credit Ratings Agencies and Trade Repositories, are regulated at an EU level rather than a UK level.
  • Financial services play a major role in the UK economy, accounting for 6.5% of the value created and 11% of tax receipts.
  • The government’s preference is still for a transition period from March 2019 to December 2020.

Action and impacts in the event of “No Deal”

  • The government has committed to introducing a “Temporary Permissions Regime”, allowing EU firms which currently “passport” into the UK to continue to do so for up to 3 years.
  • “The government will transfer functions currently carried out by European bodies to the appropriate UK body.”
  • “The Bank of England and the European Central Bank (ECB) have convened a technical working group, as announced by HM Treasury and the European Commission, focusing on risk management in the period around 29 March 2019, in the area of financial services.”
  • “The cost of card payments between the UK and EU will likely increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).”
  • “The government has committed to putting in place unilateral action, if necessary, to resolve these issues as far as possible on the UK side.”
  • “However, the UK authorities are not able through unilateral action to fully address risks to the EEA customers of UK firms currently providing services into the EEA using the financial services passport. The government is committed to working with EU partners to identify and address such risks.”
  • Regulators, such as the FCA, are providing guidance to firms.