The UK’s top financial watchdog has said market disruption is still a risk if the UK crashes out of the European Union in 30 days’ time.
Speaking to a House of Lords select committee on Wednesday, Andrew Bailey, the chief executive of the Financial Conduct Authority, warned that the “patchwork” of action across EU member states to mitigate the legal risk posed by vast amounts of uncleared derivatives may not be enough to stem market disruption in the event of a hard Brexit.
Mr Bailey drew the distinction between the UK’s approach to privately traded derivatives contracts — which it views as a financial-stability risk — and the EU’s. The EU has suggested the UK’s warnings are overblown and has left it up to member states and the private sector to find solutions to the issue of contract continuity, with varying results.
“Going back to my point about not being able to give you assurance on market disruption in the event of a no-deal exit, those kind of things are still relevant as it is a patchwork and it is a patchwork of different actions,” Mr Bailey told senior lawmakers.
His comments come as Theresa May, the prime minister, is floating the idea of a “short, limited delay” to Brexit rather than crashing out of the EU with no formal agreement. That came after she conceded that businesses and governments are woefully underprepared for a disorderly departure from the EU.
But Mr Bailey added that he had seen nothing over the past few days that would make the FCA push the pause button on its contingency plans for a cliff-edge Brexit on March 29. Mr Bailey said there would have to be a “very clear parliamentary position” to cause the FCA to halt its planning for the financial sector.
The FCA and the European Securities and Markets Authority, an EU regulator of regulators, are planning to reach an equivalence decision over credit-ratings agencies, Mr Bailey said. This will enable companies across the bloc and in the UK to keep on using ratings from the agencies, no matter where they are based.
So-called equivalence is an existing EU mechanism by which certain countries outside the bloc are deemed to have equivalent regulatory standards and so firms in certain sectors from those countries are allowed to sell their services and products in the bloc.
The UK wants the EU to overhaul its equivalence regime post-Brexit so UK-headquartered firms can retain access to the bloc. According to FCA data, almost 5,500 UK financial groups lose their passporting rights in a no-deal Brexit. Passporting allows a firm in one EU country to sell its products and services in another without the need for separate regulatory approval or locally trapped capital.
The question of how the City of London and EU firms will access each other’s markets is still unsolved. Mr Bailey said on Wednesday that the so-called Norway model — the Nordic country is part of the single market but is not an EU member state — is “problematic” as the UK would not have a say on the EU rules it would have to implement — it would be a rule-taker rather than a rulemaker.
“I have heard it said if the UK is in the Norway position it would have some choice on whether to implement legislation. I have to say, for financial regulation, I don’t think that’s the case as we would be scrutinised much more heavily,” he told the select committee.