In a ‘Dear CEO’ letter (4 page / 387KB PDF), the FCA and PRA said it was “imperative” for firms to build on preparatory work they had done ahead of Brexit in order to be ready for a range of scenarios at the end of the transition period on 31 December 2020.
The regulators warned that while there were measures in place to ensure UK businesses and individuals could continue to access services from EU financial institutions after 2020, there remained a risk of market volatility and disruption to financial services, particularly for EU clients.
Financial regulation expert Alice Bell of Pinsent Masons, the law firm behind Out-Law, said firms should take note of the letter.
“Firms need to ensure they have made all possible preparations for Brexit that are within their control. The regulators have not spelled out all of the day-one obligations so firms need to carry out that gap analysis themselves,” Bell said.
“The letter makes clear that the regulators expect firms to take action now to mitigate or prevent avoidable customer detriment and market disruption. This is not the first time the regulators have written to firms on these issues and, whilst they have said they will exercise forbearance, they are unlikely to look kindly on firms who have failed to take meaningful steps to plan ahead. Firms will need to demonstrate they have made preparations and are using best efforts to implement the necessary changes,” Bell said.
The regulators laid out several areas where firms should take action, although they did not specify the order of priority for those actions. They said firms needed to ensure the continuity of wholesale banking and contracts and complete the migration of new or existing business to EU entities soon.
Firms need to consider the impact of this on each client, and ensure they would be able to comply with national licensing regimes and exemptions in EU member states by the end of the transition period.
The regulators said firms needed to make sure they could continue servicing retail clients in the European Economic Area (EEA), acting in accordance with local law. Customers who could face a reduction or cessation in service needed to be given enough notice to allow them to find alternative arrangements, the regulators said.
The letter said the use of standard contractual clauses in relevant contracts was, in the absence of a decision by the European Commission on UK data protection adequacy, one way for firms to comply with cross-border personal data transfer laws.
It reminded firms they should consider updating relevant contracts to comply with EU requirements, or consider other measures for transferring personal data from the EEA into the UK.
The letter also said firms should continue to take “all reasonable steps” to avoid disruption to payments, noting that the UK would retain access to Single European Payment Area schemes after the transition period. However, processing payments through the schemes after Brexit will require additional information to be included about the debtor in the payment instructions.
Firms subject to the share or derivatives trading obligation needed to consider how they would meet these obligations after the transition period. The regulators said firms should discuss plans and assumptions with the FCA if they were going to make any changes to current systems and processes.
The regulators said the letter did not cover all issues that could arise, and said firms should continue to take necessary steps to address specific risks, and keep supervisors informed.