Financial firms in both the EU and Britain need clear reassurances from politicians to avoid potentially damaging instability, the Association for Financial Markets in Europe warned today.
In a new report on “cliff edge risks”, it says agreements are necessary in five key areas: data transfers, continuity of contracts, legal jurisdiction, markets access, and recognition of bank resolution actions.
AFME reports it has focused on “issues which we believe require intervention from policymakers and/or regulators and are not easily resolved by banks’ own plans or industry solutions”.
These are risks that would involve market disruption or infrastructural impediments to business if not resolved before the UK’s EU departure date.
AFME adds: “While some of these cliff edge risks would be mitigated (in whole or in part) by a longer transition period, risks remain that need to be addressed irrespective of a transition.
“It is important to note that cliff edge risks arise, unless mitigated, at the point of UK exit and at the end of the transition period.”
Simon Lewis, the chief executive of AFME, said governments and regulators needed to take “urgent action” to minimise the threat of Brexit “cliff edge” risks.
He warned: “There are now less than 15 months before the UK leaves the EU and the financial services industry continues to face significant uncertainty. It is therefore imperative that agreement is reached as soon as possible on transitional arrangements.”
Risky “derivative” contracts based on the value of underlying assets such as oil or gold could take a huge hit if the EU is not prepared to make concrete arrangements for companies trading internationally in the wake of Brexit.
Derivatives currently worth £26trillion could be affected if UK financial firms are not recognised as properly regulated entities in a special deal after March 2019.
£12trillion worth of these contracts are due to mature in the first quarter of 2019, according to Bloomberg.
Without certainty in key areas, AFME predicts financial firms’ profits could suffer on both sides of the English Channel.
AFME’s warning follows French president Emmanuel Macron’s insistence last week that the UK cannot have a special deal for financial services after Brexit, unless it remains a member of the single market.
Speaking at Sandhurst Royal Military Academy after a Friday summit with Theresa May, the French president said it was not his job to “punish or to reward” Britain. However he said if the UK was willing to obey laws made in Brussels then there is no reason why the UK cannot retain access to the single market.
Asked why he was opposed to including Britain’s financial services in any future trade deal, he responded: “I want to make sure that the single market is preserved because that is very much the heart of the EU.
“The choice is on the British side, not on my side. But there can be no differentiated access for the financial services.
“If you want access to the single market — including the financial services — be my guest. But it means that you need to contribute to the budget and acknowledge European jurisdiction.”