UK faces 'significant challenges and risks' under no-deal Brexit, warns FCA

The Financial Conduct Authority has rallied behind the implementation period proposed by the Prime Minister, warning that the UK faces “significant challenges and risks” if it crashes out of the European Union without one.

In a letter to Treasury Committee chair Nicky Morgan, FCA chief executive Andrew Bailey insisted that the City watchdog took no position on the UK's decision to leave the EU.

But he warned: “Our view is that [leaving without a deal] could create significant challenges and risks in terms of firms’ readiness, potential market disruption and insufficient public-policy solutions put in place on the side of the EU.

“Therefore, from the prospective of our objectives, we strongly support an implementation period and we have consistently called for one to be put in place.”

Bailey was delivering the FCA’s assessment of the impact of the UK leaving the EU, as requested by the government. The Bank of England published its report on Wednesday.

The FCA has looked at three different scenarios, including leaving with no deal in place and leaving under the terms laid out in the draft Withdrawal Agreement struck between Downing Street and Brussels.

It found there were risks of leaving under the Withdrawal Agreement, as the UK would be subject to EU laws – both current and new ones – but would no longer be part of any decision-making processes. The FCA would also no longer be a voting board member of the European Securities and Markets Authority.

“Should the implementation period be extended,” the FCA said, “the greater such risks become. The UK authorities can seek to reduce these risks by continuing to engage closely with EU partners during this period, but the amount of influence we can have is uncertain.”

Under the terms of the Withdrawal Agreement, the implementation period is scheduled to end by December 2020 but is extendable by up to two years.

However, the FCA insisted these risks were “preferable to the risks of a no-deal scenario”.

Under a no-deal, the FCA said that passporting rights would cease to apply, and that the UK would no longer be part of the EU legal frameworks that provide supervisory co-operation across member states. Passporting is crucial to the financial services sector, as it allows firms in the European Economic Area to carry out business in member states without the need for further authorisation.

It said that a no-deal exit could lead to “market fragmentation and increase cross border risk”, with consumers potentially affected if firms are unable to continue provide services. “Over time, market fragmentation could have a harmful impact on the financial services’ market more widely, through reduced competition and increased cost for customers in both the EEA and UK.”

The financial services sector current accounts for around 7% of the UK’s total GDP.

Parliament will vote next month on the Withdrawal Agreement, which has come in for stiff criticism across the political spectrum.