Written by Paul Grainger, CEO, Complyport.
Many financial services firms face risks relating to Brexit that could prove costly and damaging. The larger banks, insurance companies and financial institutions have assessed Brexit risks and acted upon them where able to do so. However, this accounts for a small fraction of UK regulated firms. Many financial services firms have not properly assessed Brexit related risks. Even where firms have done so, they have often not properly documented their findings and conclusions.
The current Transitional Period ends on 31 December 2020, which is only 10 weeks away. At the time of writing, there is no trade agreement with the EU that will replace the previous Single Financial Services Market passports for the delivery of retail banking services, investment services, insurance services, investment fund management services, payment services and mortgage services.
Wholesale market infrastructure (wholesale banking, settlement, clearing and reporting of transactions) poses a risk of significant disruption and harm. It is clear there will be equivalence agreements in place by 31 December, to avoid market disruption. However, to date the signs are these will be temporary and will be agreed on a sector by sector basis.
Research shows that around 50% of UK financial services is conducted within the UK with UK residents, whilst around 25% is conducted with overseas clients outside of the EU/EEA. This means that around 25% of UK business is done with EU/EEA clients. The FCA regulates around 60,000 firms of which less than 2,000 are classed as large banks, insurance companies or financial institutions. This implies that there are several thousand smaller and medium-sized UK firms who do business with EU/EEA clients.
However, Brexit risks are not confined to carrying out services for clients in the EU/EEA. What is often overlooked is the cross-border nature of the service supply chain that has arisen from the UK having been within the EU for 47 years. Many firms will find that they depend on services where there is at least an element of cross-border dependency. This is most common in services such as IT, banking, insurance, legal agreements. Two of the most obvious and important areas affected are whether employees who are EU/EEA nationals have the right to remain and work in the UK and data storage and sharing.
The problems arise in smaller and medium sized firms who have not carried out any proper risk assessment of the impact on their business of Brexit with or without a trade deal. Many may be unaware of issues that are likely to cause severe problems if those Brexit risks crystallise and cause harm to clients or significant disruption to a firm and its profits or capital base.
Such incidents must be reported to FCA. This is likely to cause concern to the FCA as it has persistently warned firms to ensure they have carried out risk assessment and planning to prepare for Brexit alongside other risks ranging from capital and liquidity adequacy, conduct of business issues and major events such as the COVID -19 Pandemic.
Against the background of the implementation of the Senior Managers and Certification Regime (SMCR) with its focus on senior managers being aware of major risks and having controls in place to mitigate them, firms can expect little or no sympathy from the FCA if things go wrong. At best, a firm will find it’s reputation damaged and, at worst, it could face fines and severe sanctions imposed on its senior managers.
Many smaller and medium sized firm may not have the knowledge and skills to carry out the required risk assessment. Even where they have, they may lack the experience and know-how to deal with the outcome. Such firms must bite the bullet and seek help from external experts. Hiring good advisers to identify and mitigate the problem is likely to be much more cost-effective than ignoring it and facing client dissatisfaction, reputational damage and regulatory fines and sanctions.
Paul brings with him over thirty-five years of financial services experience including over thirty years in financial services regulatory and compliance consultancy in wholesale and retail markets. He currently chairs the APCC’s EU Withdrawal (Brexit) Working Group and is regularly in the press and on Brexit discussion panels.