The Bank of England has issued a letter to investment managers and other City firms requiring them to outline contingency plans in case the UK exits the European Union with no deal.
The Bank also argues firms are not well prepared for the most adverse potential outcomes from Brexit.
Written confirmation of contingency plans is required from banks, insurers and designated investment managers that conduct cross-border activity between the UK and the rest of the EU, the letter from Prudential Regulation Authority’s chief executive Sam Woods says.
It must cover plans for the most adverse potential outcomes and be provided to the PRA by 14 July, which will share relevant information with the FCA.
Woods says many firms are well-advanced in their planning, but that this varied across companies and that “plans may not be sufficiently tested against the most adverse potential outcomes”.
Woods says firms should be prepared for “if there is no withdrawal or trade agreement in place when the UK exits from the EU”.
Contingency plans must also address the potential that the UK and EU do not reach agreement on issues such as implementation periods, mutual recognition of standards, and co-operation in financial regulation or supervision.
It warns non-UK firms that they must apply for authorisation with the PRA, which may be required to keep operating as an incoming branch or a subsidiary after Brexit.
“As part of this, firms should develop contingency plans for authorisation, including possible structural changes such as setting up a subsidiary,” Woods says.
A ‘fork in the road’
The PRA letter comes as Bank of England Governor Mark Carney says the global financial system is at a fork in the road and that Brexit could prove highly influential in determining which road is taken.
“On one path, we can build a more effective, resilient system on the new pillars of responsible financial globalisation. On the other, countries could turn inwards and reduce reliance on each other’s financial systems,” Carney told an audience at Thomson Reuters.
Carney warns the latter option would lead to fragmented pools of funding and liquidity, reduced competition and impeded cross-border investment.
“The net result would be less reliable and more expensive financing for households and businesses, and very likely lower growth and higher risks in all our economies.”
Carney says the spirit of the letter received by financial services firms today is to plan for all eventualities, including for a shorter time horizon and a more extreme outcome.