The UK’s most senior supervisor of banks and insurers has given his starkest warning to date over the risks the financial system faces from a cliff-edge Brexit without a transition period.Sam Woods, a deputy governor of the Bank of England, said an audit of worst-case contingency plans by banks and insurers had underlined fears of added cost and complexity for business and supervisors, should companies lose their EU “passport” with no time to adjust to a new regime.The BoE’s Prudential Regulation Authority, which Mr Woods heads, and its counterpart, the Financial Policy Committee, will now analyse whether the collective execution of those worst-case plans — which include moving jobs and business from Britain — could pose risks to financial stability.The PRA’s recent study of more than 400 contingency plans revealed that there were particular concerns over companies’ ability to service existing contracts, Mr Woods said in a letter to parliament’s Treasury select committee. “Some form of implementation period is desirable, in order to give UK and EU firms more time to make the necessary changes to adjust to the UK’s new relationship with the EU in an orderly way,” said his letter, which was published on Wednesday.
Philip Hammond, the chancellor, has led a push in cabinet in favour of a transition period of up to three years after Britain officially leaves the EU in March 2019. But a number of ministers, including Liam Fox, international trade minister, have warned that an implementation period retaining freedom of movement would run counter to the spirit of last year’s Brexit vote. Michel Barnier, the EU’s chief Brexit negotiator, has cautioned that there could be no certainty over a transition deal until the framework for a future relationship was agreed.Mr Woods’ letter is published a week after the BoE cut its forecasts for UK economic growth and left interest rates unchanged, warning that persistent uncertainty over Britain’s future relationship with the EU is holding back business investment and household spending. The financial sector is pushing for a transition arrangement because it cannot wait for an eventual Brexit deal before executing plans to keep open for business and honour contracts: setting up EU bases, which it would need to do in the event of the loss of passporting, takes many months.
The Royal Bank of Scotland and Japan’s largest bank, Mitsubishi UFJ Financial Group, confirmed last week that they would expand or open eurozone bases in Amsterdam in the event of a hard Brexit.Meanwhile, some insurers are worried that Brexit will hit their ability to pay claims. Cross-border policies sold while Britain is in the EU might not be valid after Brexit. In preparation, many of them are moving business from their London offices to newly established subsidiaries elsewhere in the EU via a court-approved process known as a Part VII transfer. These transfers can be expensive and time-consuming, leading to fears that some will not have everything in place by March 2019. The PRA forecasts a possible “significant increase” in the volume of Part VII transfers, the letter reveals.The regulator also expects to have to make “some difficult prioritisation decisions” as the burden of Brexit weighs on the PRA’s own resources, particularly with a flurry of new entities to supervise as companies restructure.
The PRA first put business on notice in April to improve its planning for a cliff-edge Brexit. All companies, from high street lenders to European insurers and US investment banks that use London as a base, had to submit their plans to the PRA by July. The regulator received 401 responses after all institutions responded, except for a handful of small insurers, Mr Woods said.He wrote to the select committee after Nicky Morgan, its new chair, asked the PRA for information on banks’ contingency plans, in one of her first public moves since taking over the role.“I welcome his commitment to provide further information when the PRA has completed its detailed analysis, which the committee will undoubtedly want to consider,” said Ms Morgan, a pro-Remain Conservative MP and former City lawyer. “The UK leaving the European Union is a complex task. The potential extra burden on the PRA’s resources, and the risk that may pose to its objectives, is an issue that I’m sure the committee will want to monitor.”