Governance, Risk & Compliance: GRC
Brexit-fuelled Uncertainty Sparks Mass Exodus of Financial Firms
With the escalating national emergency over Brexit, the UK’s global financial stronghold is in question. With droves of financial services firms already jumping ship, those that have chosen to weather the storm are bracing themselves for even more regulatory and compliance hoops to jump through. Could RegTech be the key to help them navigate calmer waters?
In the run-up to the 1963 General Election, former Prime Minister Harold Wilson coined the famous phrase “A week is a long time in politics.” Fast-forward 56 years and the ongoing Brexit saga makes that sound like a major understatement – especially where banking and finance firms are concerned.
Late last year, the UK’s financial services sector was upbeat about plans set out to achieve a Brexit deal; one that recognizes its importance to the economy. Less than six months later – aeons in the modern world of politics – and the outlook is far from positive, as political uncertainty prevails.
Even before the House of Commons rejected the latest Brexit deal and Prime Minister Theresa May admitted the country is ‘in crisis’, the UK’s financial services sector was preparing for the worst. According to a study by capital markets think tank New Financial, 275 banking and finance firms have moved – or plan to move – a large chunk of their business from the UK to the EU in preparation for a hard Brexit.
This mass exodus of financial firms’ assets has already seen around £900 billion moved out of the UK – conservative estimates suggest £800 billion worth of assets have been moved by banks and investment banks, more than £65 billion in funds have been transferred by asset managers, and £35 billion worth of assets have been moved by insurance companies.
So, where are they going exactly? Dublin is by far the most popular destination with 100 relocations, followed by Luxembourg (60), Paris (41), Frankfurt (40) and Amsterdam (32).
More importantly, what will be the impact on the UK’s financial services sector? It doesn’t make for pleasant reading:
London’s reputation as Europe’s financial powerhouse will be eroded
Financial services will suffer from increased cost, complexity and risk
It will limit the UK’s global influence in the banking and finance industry
Tax receipts and exports within the financial services industry will feel the effects
And it’s not just the firms on the coal face that are preparing for the worst; the regulators have been at it too. While the PM was penning a letter to the EU asking for a delay to Brexit, the Financial Conduct Authority (FCA) was busy writing up plans of its own. Dubbed the “financial war room”, the FCA’s contingency plan for a no-deal Brexit brings this potential eventuality into sharp focus. Designed to monitor post-Brexit IT changes, the war room will enable the FCA to maintain contact with leading City firms and respond to any disruptions in the financial markets.
"To mitigate the fallout from a pending ‘no-deal’ and the potential compliance and regulatory knock-on effect this will bring, requires an automated approach, combined with the real-time insight provided by an industry expert that understands exactly what must be done."
Rob Van Straten
Executive VP, EMEA & APAC at SAI Global
The Rocky Path Ahead
So, what does the future hold? How long is a piece of string? The Brexit drum grows ever louder as the deadline looms but the tune remains the same, with many questions still unanswered. The enduring uncertainty surrounding a deal or no-deal is a major issue for the UK’s financial services sector. Take passporting rights for example: with a no-deal they would cease to exist, meaning banks would be blocked from selling their services across EU borders.
Yes, contingency planning by banks, exchanges, regulators and asset managers – combined with agreements reached between UK and EU regulators – has given the industry a level of surety in the event of a no-deal Brexit. According to The Bank of England as many as 80% of firms it surveyed reported they were ready for a no-deal, no-transition Brexit, up from 50% in January. Yet, many firms are unclear about what exactly they should plan for, which the Bank said would limit their readiness.
However, with the clock ticking and little sign the current deadlock in Westminster can be broken, there is a growing sense of unease in the boardrooms of the City and the Square Mile. Those large firms that haven’t already scrambled to relocate activities overseas are currently on standby for last-minute moves to rival financial hubs as part of their no-deal Brexit preparations.
And with March 29th now upon us, optimism in the UK financial services industry is plunging at the fastest rate since the financial crisis. Little wonder given the industry’s concerns stretch beyond their ability to conduct business effectively without the benefits EU membership brings. The risk and compliance implications of a no-deal – from where to host regulated data to achieving good governance – could leave them reviewing their entire business model.
Technology Can Take the Sting Out of Compliance
As the UK’s exit from the EU beckons, the country’s regulators are working frantically to address the regulatory gaps that could arise from a no-deal scenario. And despite all the crowing and ripples of discontent from industry commentators, one thing they are aligned on is the likelihood that compliance and regulatory demands will grow tougher.
Although we may not see more policy-making of the scale of MiFID II or Dodd-Frank, in pushing ahead with the Senior Managers and Certification Regime and the Asset Management Study, UK regulators show they aren’t really slowing down.
For those firms who don’t jump ship for greener pastures, any additional compliance that comes with Brexit can be addressed with the right tools. To mitigate the fallout from a pending ‘no-deal’ and the potential compliance and regulatory knock-on effect this will bring, requires an automated approach, combined with the real-time insight provided by an industry expert that understands exactly what must be done.