The Association for Financial Markets in Europe (AFME) has published a paper on transitional arrangements in financial services following the UK’s departure from the EU. The note is intended to explain in more detail the importance and necessity of transitional arrangements as well as summarising the AFME’s views on what such arrangements should look like.
In the paper the AFME explains why transitional arrangements are needed in order to avoid cliff edge risks in financial services. In particular the AFME believes that the need to address cliff edge risks through transitional arrangements should be an objective for both the EU and the UK. The AFME describes further work that it is conducting on the following cliff edge risks: central counterparty recognition, existing contracts and data transfers.
The AFME set out what it believes is needed in relation to the design of a transitional period. This includes the following:
- during the transitional period, existing market arrangements would need to be maintained to provide clarity and stability to businesses and market participants as they prepare to adjust their operations to the final permanent relationship. This means that existing legislation, regulation, permissions and authorisations should continue to be effective during the transitional period;
- the EU27 and UK Government should commit to a period of transition in a legally binding agreement as soon as possible. Pending the conclusion and ratification/endorsement of such agreement, they should at least commit by the end of 2017 on the principle of a transitional period in a formal political joint EU27/UK statement. However, any such political statement will need legal and regulatory underpinning before it can be relied upon; and
- the transitional arrangements should comprise: (i) a bridging period to avoid short-term disruption until the new relationship between the UK and the EU27 is ratified, should that prove unachievable within the two-year Article 50 period. This period would avoid damaging “cliff edge” effects; and (ii) an adaptation period, following the bridging period, which would enable phased adjustments to the new trade relationship. The length of the bridging period would depend on the time it will take for the UK and the EU27 to negotiate their new trade relationship and on the nature of the new relationship.
In terms of additional transitional measures, the AFME suggests that the following steps should be taken to minimise disruptions and support transition:
- cross-border trades and contracts which are executed prior to Brexit, but which continue after Brexit, should be grandfathered;
- regulators should a adopt a flexible and pragmatic approach to the new structures and operating models that firms propose, including accelerating the approvals process and leveraging prior regulator- approved risk models (possibly followed by a longer term re-assessment);
- regulators, central banks and national governments should continue to support financial market stability. This may involve more regular market communications and targeted support in case of market need (e.g. access to liquidity schemes);
- public authorities in both EU27 and the UK should identify whether the individual measures needed to implement a transitional period in their own jurisdiction require bilateral agreement between the EU27 and the UK, or could be implemented on a unilateral basis.
The AFME concludes by stating: “Both policy makers and business recognise the importance of transitional arrangements. It is important that the parties negotiating the UK’s exit from the EU provide clarity on these arrangements as early as possible. This would assist business and market participants during the adaptation period. It would also help in making sure that market efficiency and financial stability are safeguarded as much as possible.”
View AFME paper on Brexit transitional arrangements for financial services, 6 September 2017