No-deal scenario could test Bank’s resources
Licensing finance firms to operate in UK after Brexit would be a heavy burden, says BOE deputy governor
A TIDE of EU finance firms may need to apply for licences to operate in the UK after Brexit, stretching the Bank of England’s resources dangerously thin, a top regulator has warned.
More than 8,000 businesses are registered elsewhere in the EU and use the “passport” rules to access the UK market. If they need to apply for UK licences after Brexit then it could place a heavy burden on British regulators.
“The authorisation, and then the ongoing supervision, of a significant number of additional firms is likely to place a material extra burden on the Prudential Regulation Authority’s resources,” said Sam Woods, the PRA’S chief executive.
“It is incumbent on us to manage this burden but we may have to make some difficult prioritisation decisions in order to accommodate it.”
He set out his worries in a letter to Nicky Morgan, the new chairman of the Treasury Select Committee, in the House of Commons.
She wrote to Mr Woods last month to ask what finance firms are doing to pre- pare for Brexit and how the sector can cope with a “no deal” scenario following the negotiations with the EU.
Mr Woods identified other potential disruptions for businesses and regulators, if and when an extra effective border comes down between the UK and EU. “Firms’ submissions to us provide further evidence of cross-sectoral risks we have previously identified, specifically issues relating to the continued servicing and performance of existing contracts and restrictions on data transfers,” he said.
The deputy governor of the Bank of England added that he is working to make sure UK regulators will still be able to keep an eye on foreign units of British finance companies.
“Restructuring by firms to mitigate risks to their business will in general increase complexity. In particular in relation to ‘outbound’ firms (those firms based in the UK but selling services to clients in the EU) for both banks and insurers, restructurings will in many cases result in strongly interconnected entities between the UK and the EU,” he said in the letter.
“We will need to ensure that these structures do not impede supervisability or resolvability.”
The Bank of England has previously highlighted other issues, noting that fragmentation of the EU financial services market could push up costs and risks for finance firms and their customers. Officials have also noted that any wider harm to the economy following Brexit could expose banks and other financiers to higher loan losses and lower asset prices.
Mr Woods said that the PRA has received 401 responses from UK and European companies that operate in the UK and elsewhere in the EU, with “a handful of very small insurers” yet to reply.
These replies will be analysed in the coming months with regulators forming a firmer view of the situation by the autumn, he said.
Ms Morgan said that the Treasury Committee was likely to look at the issue. “The UK leaving the European Union is a complex task.
“The potential extra burden on the PRA’S resources, and the risk that may pose to its objectives, is an issue that I’m sure the committee will want to monitor,” she said in response to Mr Woods’s letter.