A looming crisis over the failure of cross-border financial contracts post-Brexit is posing a significant risk to financial stability and the personal finances of millions of people.
Thirty-six million insurance policyholders across the UK and EEA, and £26 trillion of outstanding uncleared derivatives contracts could be impacted if the UK and EU fail to agree on a solution.
Firms are urgently taking steps to mitigate the impact on customers and clients. However, without regulatory support across Europe it is highly unlikely that this will be adequate to fully address the problem in the time that remains.
A paper published today by TheCityUK – ‘Continuity of cross-border financial contracts post-Brexit’ – makes clear that the only workable solution to this problem is a coordinated UK/EU response involving both the public and the private sectors.
TheCityUK argues that the full range of affected cross-border contracts must be grandfathered, either for a time-limited period, or potentially until maturity. This would protect UK and EEA policyholders and institutions and avert potential widespread financial losses.
Miles Celic, Chief Executive Officer, TheCityUK, said,
This sounds like an obscure issue, but ignoring the question of contract continuity post-Brexit is to play a dangerous game of chicken with the finances of customers across the whole of Europe. Without a viable solution, millions of people could be left without a safety net. This must not be sucked into the Brexit negotiations. It is a non-political, technical issue and needs a non-political, technical solution.
“Continuing to be able to serve customers and clients is the industry’s number one priority. While firms are doing everything they can, this is not a problem that businesses can fix alone and requires a coordinated UK/EU approach. Without it, people and businesses across Europe could be left dangling over a cliff edge following Brexit.”
The issue of contract continuity will impact insurance, pensions, medium and long-dated derivatives contracts, and revolving credit facilities. It may also affect general customer terms of business, prime brokerage and custody arrangements.
While firms are working hard to find a solution, a number of insurmountable barriers remain which require either regulatory or legislative support.
Some contracts simply cannot be transferred and require special regulatory intervention. Others require new entities to be set up and capitalised, a process which cannot always be completed in the time available. Moving contracts from one entity to another also requires customer interaction and clearance which will take time given the scale and number of contracts involved.
Finally, regulatory capacity is an issue. Many European regulators will need to take on oversight of products and services they have not previously had experience with and they may need to take on more capacity and train additional personnel.
The grandfathering of contracts could be achieved in three different ways:
- A bilateral agreement between the UK and EU, supported by regulatory co-operation.
- Separate regulatory action or legislation in each jurisdiction, consistent with the approach agreed between the UK and EU.
- Inclusion in the EU Withdrawal Agreement alongside appropriate regulatory backing for such a political agreement.
Any of these options would need to be underpinned by ongoing supervisory cooperation between the UK and the EU regulators beyond Brexit.