[author: Alexandra Ames]

On March 21, the Financial Conduct Authority (FCA) published a speech given by Nausicaa Delfas, FCA Executive Director of International, on Brexit.

Among other things, in her speech, Ms. Delfas explains that all of the FCA’s activity has been aimed at reducing the impact of Brexit on firms. Most of the risks to UK financial stability that could arise from a no-deal Brexit have been mitigated – however, some residual risks remain, which could affect households and businesses both in the UK and the EU:

• The process of migrating businesses, assets and contracts in a short period could pose operational risks.
• UK and global banks are transferring activities to EU-incorporated entities but are to some extent dependent on their clients agreeing to move contracts to these new entities. The FCA is aware that there is varying progress with this.
• On the issue of contract certainty, the EU does not have a pan-EU equivalent to the UK’s temporary permissions regime (TPR) and financial services contracts regime (FSCR). Some of the member states are taking action, and firms are taking their own action. There are likely to be some areas where the legal risks relating to the ongoing servicing of existing customers have not been fully mitigated. Firms are encouraged to take the steps they can to act lawfully and consistently with local regulators’ expectations. Their decisions should also be guided by what is the right consumer outcome.
• There are implications of a lack of equivalence in certain areas. For example, the EU’s trading obligations for shares and derivatives will require EU firms to trade these instruments on EU or equivalent trading venues. In the absence of equivalence, European Securities and Markets Authority (ESMA) has published its expectations for the scope of the EU’s share trading obligations. The FCA believes that this will create issues of conflicting obligations applying to the same instruments. Where this is the case, firms may be limited to trading certain shares only in either the UK or EU. In some cases, they may be caught by overlapping obligations. This has the potential to cause disruption to market participants and issuers of shares based both in the UK and EU, in terms of access to liquidity.

Firms are encouraged to raise any concerns or issues as early as possible. If risks materialize, the FCA will continue to take a pragmatic and practical approach to resolving issues.