Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Banking Authority Warns Financial Institutions to Prepare for a Hard Brexit
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  • European Banking Authority Warns Financial Institutions to Prepare for a Hard Brexit
    The European Banking Authority has published an Opinion on preparations for the withdrawal of the U.K. from the EU. The Opinion is addressed to EU national regulators and regulators in the European Free Trade Area States (Norway, Liechtenstein and Iceland), the European Central Bank and the Single Resolution Board. The Opinion concerns the activities of financial institutions in the context of preparing for the U.K.'s withdrawal. Financial Institutions comprise credit institutions, investment firms, payment service providers, electronic money institutions, creditors and credit intermediaries.

    The purpose of the Opinion is to encourage national regulators to ensure that financial institutions are adequately considering the risks that arise from the possible departure of the U.K. from the EU in March 2019 without a ratified withdrawal agreement in place (a so-called "hard" Brexit). The EBA also seeks to ensure that national regulators draw the attention of financial institutions to their consumer protection obligations should that eventuality occur.

    The EBA has been monitoring the level of contingency planning by firms through its engagement with national regulators. In its view, preparations by firms are inadequate. Political agreement was reached in March 2018 on an agreed "transition" or "implementation" period that would run until December 31, 2020. However, the EBA warns that this does not provide any legal certainty until the withdrawal agreement is ratified. The U.K. will depart the EU without a transitional period on March 30, 2019 if the withdrawal agreement is not ratified by that time. In light of this risk, the EBA urges firms to pursue any necessary mitigating actions without delay.

    The Opinion goes on to list a series of issues that national regulators should ensure financial institutions consider when assessing the implications of the U.K. withdrawal for their business. These include identifying relevant risk channels (direct financial exposures, existing contracts, reliance on financial market infrastructures, storage and transfer or data, reliance on funding markets), the implications for capital planning, the need to obtain any necessary regulatory permissions, the implications for their booking models and outsourcing arrangements, the need to engage with affected clients, the availability of financial market infrastructure and the implications for recovery and resolution planning. Notably, the EBA is empowered to issue advice or determinations on several equivalency regimes which would definitively address a number of the risk issues which it now highlights, but the EBA has taken no steps to provide such assurances. The EBA appears not to consider that it has been empowered politically to take such steps, even on basic issues such as group capital equivalence.

    The Opinion also stresses the need for firms to consider their obligations to existing and prospective customers. It sets out a list of minimum information that national regulators should ensure firms send, no later than the end of 2018, to customers whose contracts or services might be affected. It also states that national regulators should require firms to inform them of their customer communications and to provide them with the text of those communications on request.

    View the Opinion (EBA/Op/2018/05).

    View our Client Note on Brexit Contingency Planning.

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