On 25 June 2018, the European Banking Authority (EBA) published an opinion relating to the risks posed by the lack of preparation by financial institutions for the departure of the UK from the EU.

The EBA opinion is addressed to competent authorities of financial institutions that are currently present in the UK and provide services to the EU27, as well as financial institutions that are currently based in the EU27 and interact with counterparties, clients or customers based in the UK.

The EBA states in the opinion that a ratified withdrawal agreement may provide all stakeholders with more time to implement the necessary changes, but, given the lack of certainty, mitigating action needs to start now if not already done so.

The EBA opinion also discusses risk assessment and preparedness for Brexit. Key points include:

• to be adequately prepared, financial institutions should identify the risk channels arising from the possible departure of the UK from the EU without a ratified withdrawal agreement in March 2019;
• if financial institutions identify relevant risks, they should consider the implications in the event that the risks materialise. This assessment should include consideration of the implications with respect to their solvency and liquidity positions, as well as their business models;
• where appropriate, in view of their business models, financial institutions should ensure that they have the necessary regulatory permissions in place both in the UK and in the EU27 to conduct new business and support existing business. If new or expanded regulatory permissions are needed, these applications should be submitted, and / or other relevant steps taken, as soon as possible, to allow sufficient time for them to be processed and to be in place by March 2019;
• careful consideration should be given to how any new or expanded entity fits into a financial institution’s existing organisational structure. The booking model of the financial institution should clearly articulate how and where risk, including market risk will be managed;
• financial institutions should not outsource activities to such an extent that they operate as ‘empty shell’ companies, and all institutions should have the substance to identify the capability to manage the risks they generate from the first day after the withdrawal of the UK, as the EBA made clear in its opinion on Brexit of 12 October 2017;
• financial institutions should identify which existing or future contracts will be potentially affected. Issues with such contracts may in particular include those related to the performance of ancillary services or actions that require particular regulatory permissions;
• financial institutions should identify the financial market infrastructures to which they need access that are based in the UK (for EU27 institutions) or the EU27 (for UK institutions);
• financial institutions should assess their reliance on wholesale funding and their ability to continue accessing this funding in the event of the departure of the UK from the EU without a ratified withdrawal agreement with a loss of market access;
• financial institutions that are subject to the Bank Recovery and Resolution Directive (BRRD) should assess the extent to which their MREL-eligible liabilities are issued under UK law (for EU27 institutions) or under EU27 law (for UK institutions), having regard to the fact that such issuances may cease to be eligible for MREL following the UK’s departure from the EU; and
• financial institutions that are subject to the BRRD should ensure that, where they choose to issue new non-MREL liabilities under UK law (for EU27 institutions) or EU27 law (for UK institutions) that might be subject to bail-in as part of a resolution action, these can credibly be written down or converted through the inclusion of bail-in recognition clauses.

The EBA opinion also covers customer communications. It states, among other things, that to minimise any potential disruption arising from customer confusion, competent authorities should engage with financial institutions to ensure that they provide clear information to customers whose contracts or services may be affected, as soon as that information becomes available to them, and in any event no later than the end of 2018.