The European Banking Authority (EBA) has voiced its concerns about the level of preparedness of the financial sector in light of Brexit. Despite the potential departure of the UK from the EU in less than 9 months away, the watchdog has found an apparent lack of preparation by financial institutions for this event and made clear “firms cannot take for granted that they continue to operate as at present nor can they rely on as yet unrealised political agreements or public policy interventions” He added “Risks, capacity and legal implications must be examined and addressed”, according to Chairperson of the EBA Andrea Enria.
In an Opinion relating to the risks posed by lack of preparation by financial institutions for the departure of the UK from the EU published today, the regulator asks Competent Authorities to ensure that financial institutions take practical steps now to prepare for the possibility of a withdrawal of the UK from the EU with no ratified Withdrawal Agreement in place, and no transition period.
The EBA explained that in response to this unprecedented situation, considering that the potential for disruption to financial institutions and their customers if financial institutions are not adequately prepared poses serious risks, competent authorities needed to ensure that financial institutions are preparing adequately for this situation, as well as meeting their obligations to their customers in these circumstances.
The opinion is addressed to the competent authorities of the financial institutions that are currently present in the UK and that provide services to the EU27 (whether directly or by establishment), as well as financial institutions that are currently present in the EU27 and that interact with counterparties, clients or customers based in the UK (whether directly or by establishment). It aims to ensure that competent authorities:
- a) ensure that financial institutions are adequately considering the risks entailed by the possible departure of the UK from the EU without a ratified withdrawal agreement, and that they are putting in place appropriate plans to mitigate any risks in an appropriate timeframe; and
- b) draw attention to the customer protection obligations of financial institutions in these circumstances.
As a result of the analysis of the EBA, the authority has decided to issue this opinion at this time for several reasons:
- a) progress in the preparations of financial institutions for the potential departure of the UK from the EU without a ratified withdrawal agreement in March 2019 is inadequate;
- b) the recent political agreement on a transition period, while welcome, does not provide any legal certainty until a withdrawal agreement is ratified at the end of the process for the departure of the UK from the EU;
- c) there remains a material possibility that, despite the best efforts of both sides to conclude a ratified withdrawal agreement, this may not be possible, in which case the UK would leave the EU on 30 March 2019 by operation of law without a transition period; and
- d) the necessary mitigating actions take time, and should be pursued without further delay.
The EBA says that it is cognisant that the necessary actions will entail costs; this is, however, an inevitable consequence of the departure of the UK from the EU. Financial stability should not be put at risk because financial institutions are trying to avoid costs. A ratified withdrawal agreement may provide all stakeholders with more time to implement the necessary changes, but, given the lack of certainty, mitigating actions need to start now if they have not already done so. Financial institutions, and their boards, have obligations to their shareholders and to their customers to take action in a timely manner.
The EBA provides in its opinion a risk assessment and measures to prepare for the impact of Brexit without a ratified withdrawal agreement. These findings together with the full opinion can be found here.
The EBA will continue to monitor developments, including by engaging with competent authorities to assess the aggregate level of contingency planning being carried out by financial institutions. The EBA will assess the extent to which the EBA’s opinion is effective in mitigating the risks identified.
In addition, the EBA will conduct its analysis and make use of its powers and oversight tools to support supervisory convergence through bilateral engagements with the supervisory and resolution authorities, providing further communications as the need arises.