PRA response on contingency planning for Brexit

The Prudential Regulation Authority (PRA) has indicated four key issues/risks in light of Brexit and has put a marker down about the importance of a transition period to allow the UK to adjust.

Sam Woods, CEO of the PRA has responded to Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, about the PRA’s recent survey of regulated firms that undertake cross-border activities between the UK and the rest of the EU.

In his letter dated 2 August 2017, Woods confirms that 401 responses were received to the PRA’s survey – 147 from banks and 254 from insurers.

Confirming that he expects to be able provide fuller information in the autumn, Woods flags four main issues in response to points by the Treasury Committee:

  • Identification of two main channels of risk to financial stability - increased fragmentation of services and disruption to UK real economy that could test the resilience of the financial system.
  • Evidence of cross-sectorial risks relating to the continued servicing and performance of existing contracts and restrictions on data transfers. For insurance firms, this includes the possibility of a significant increase in the volume of Part VII transfers between entities.
  • Increased complexity from re-structuring by firms to mitigate risks to their business.
  • Extra burden on the PRA’s resources from the authorisation and supervision of additional firms.

In welcoming the correspondence, Mrs Morgan said:

“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.”
Comment

The Treasury Committee has recognised as a cause for concern the potential “cliff edge” facing businesses in April 2019 if the UK leaves the EU without agreed arrangements in place, particularly in the financial services sector. How banks and insurers will respond as the Brexit deadline approaches, and the key risks of a ‘no deal’ scenario, are vital to the exit process.

Mr Woods’ comments confirm yet again the importance of an implementation period for firms to prepare for a new UK-EU economic relationship, which many will interpret as requiring transitional arrangements with the EU. More generally it sets out key areas that will inform the Bank’s own contingency planning in the months ahead.

It will be interesting to see in due course whether the FPC and PRC are prepared to expand on the detail of what any implementation period will in practice require. A smooth transition for the financial sector could be key to ensuring that the City retains its pre-eminence as a global financial centre and to protecting the wider economy as the UK leaves the EU.

Background

On 7 April 2017, Mr Woods wrote to banks, insurers and designated investment firms undertaking cross-border activities between the UK and the rest of the EU. He requested a summary of their contingency plans for the UK’s exit from the EU, and assurances that those plans covered the ‘most adverse potential outcomes’, in which the UK leaves the EU with no withdrawal or trade agreement, and no transitional arrangements to mitigate a sudden loss of market access.

In preparation for the formation of the Treasury Committee, which may wish to consider the implications of exiting the EU for financial services, Mrs Morgan wrote to Mr Woods on Monday 24 July 2017, requesting information that included the following: 

  • Mr Woods’ assessment of the preparedness of firms for a no deal scenario, in which the UK leaves, and whether firms that are underprepared share common characteristics.
  • The nature and timing of the actions firms will take as the risk of a no deal scenario rises, and whether firms have identified common trigger points that precipitate such action.
  • How the nature and timing of actions firms will take under a “no deal” scenario varies by the nature of the business they conduct (e.g. banking versus insurance), and the type of legal entity (e.g. UK-headquartered bank versus a subsidiary of a US bank).
  • Whether the collective execution of ‘no deal’ contingency plans poses a material risk to the PRA’s objectives, and to financial stability more generally, and whether firms are waiting for competitors to execute their contingency plans before activating theirs.
  • Mr Woods’ views on the desirability and design of transitional arrangements, including a bridging period between the end of the Article 50 negotiations, and the entry into force of an agreement on a new UK-EU economic relationship.

Related item: Great Repeal Bill: the long and winding road to Brexit