There’s a rising concern over issues surrounding cross-border financial contracts post-Brexit, with TheCityUK estimating 36 million policyholders across the continent may be at risk.
This potential crisis would affect £26 trillion of outstanding uncleared derivatives should the UK/European Union (EU) fail to reach a solution in time.
According to reports by TheCityUK, attempts by firms to mitigate impact on customers and clients will fall short without regulatory support across Europe. It’s believed that the only workable solution would be a coordinated UK/EU response involving both the public and the private sectors.
contract continuity issues on this scale would impact insurance, pensions, medium and long-dated derivatives contracts, and revolving credit facilities. It may also affect general customer terms of business, prime brokerage and custody arrangements.
TheCityUK argues that the full range of affected cross-border contracts must be grandfathered, either for a time-limited period, or potentially until maturity. This would protect UK and European Economic Area (EEA) policyholders and institutions and avert potential widespread financial losses.
It says the grandfathering of contracts could be achieved in three ways, pointing to a potential bilateral agreement between the UK and EU supported by regulatory co-operation, separate regulatory action or legislation in each jurisdiction and Inclusion in the EU Withdrawal Agreement alongside appropriate regulatory backing for such a political agreement.
Any of these options, TheCityUK says, would need to be underpinned by ongoing supervisory cooperation between the UK and the EU regulators after Brexit.
Chief Executive Officer (CEO) of TheCityUK, Miles Celic, said, “This sounds like an obscure issue, but ignoring the question of contract continuity post-Brexit is to play a dangerous game of chicken with the finances of customers across the whole of Europe.”
“Without a viable solution, millions of people could be left without a safety net. This must not be sucked into the Brexit negotiations. It is a non-political, technical issue and needs a non-political, technical solution.”
“Continuing to be able to serve customers and clients is the industry’s number one priority,” added Celic. “While firms are doing everything they can, this is not a problem that businesses can fix alone and requires a coordinated UK/EU approach. Without it, people and businesses across Europe could be left dangling over a cliff edge following Brexit.”
A number of insurmountable barriers requiring either regulatory or legislative support remain despite substantial efforts.
TheCityUK states that some contracts cannot be transferred and require special regulatory intervention. Others require new entities to be set up and capitalised, a process which cannot always be completed in the time available.
Moving contracts from one entity to another also requires customer interaction and clearance which will take time given the scale and number of contracts involved.
Additionally, regulatory capacity will be an issue. Many European regulators will need to take on oversight of products and services they have not previously had experience with and may need to take on more capacity and train additional personnel.
