A hard Brexit poses risks to the integrity of financial markets and could make it harder to protect consumers from wrongdoing by banks, the head of the City regulator has warned MPs.
Andrew Bailey, chief executive of the Financial Conduct Authority, said that a cliff-edge Brexit – one in which the regulatory framework changes the instant the UK leaves the EU – also presented competition risks, alongside threats to legal and market stability.
In his latest letter to the Treasury select committee, Bailey said a sudden exit from the EU could make it difficult for regulators to obtain information about the firms they regulate.
“Any lack of certainty with regard to the regulatory framework may affect the ability of the FCA, and perhaps other regulators, to take enforcement action as a means of both addressing and deterring misconduct,” said Bailey.
He also highlighted the risks associated with the sudden loss of the “passport” that firms based in the EU use to operate freely within the 28 member states. Bailey has previously told the committee that 5,476 UK-registered firms hold at least one passport to do business in another EU or European Economic Area member state while just over 8,000 companies authorised in other EU states use these rules to do business in the UK.
There was a risk, he said, that firms could end up without the correct permissions to sell products or find themselves vulnerable to legal action if they are not able to meet pledges to provide services to customers. The FCA may not have enough time to process applications – which take around 23 weeks –if the loss of passporting is only agreed late in the negotiations.
Bailey also provides an example of the impact of a sudden loss of passporting rights on contracts. Insurers use passporting provisions to conduct their business. “Without suitable transitional provisions, there may be considerable uncertainty created for firms and consumers as to what the loss of passporting means in practice. We cannot rule out related risks at this stage so my teams are continuing work to map and consider potential mitigations to these risks,” said Bailey.
“None of the above risks are beyond mitigation, but the types of solutions required may be complex,” said Bailey, who added that the FCA may not be able to act alone. Ministerial action and co-operation from other governments and European national regulators may be needed.