PwC has recently completed a study of global banks, commissioned by the Association of Financial Markets in Europe (AFME), to assess their views on the key operational consequences of future market access, with particular focus on a 'hard Brexit' scenario.
The key conclusions of the study include:
• Brexit presents clear challenges to the EU banking industry and the uninterrupted supply of banking and payment services around the EU.
• Brexit is likely to require significant transformation activity as banks, clients, market infrastructure and regulators simultaneously carry out their potentially conflicting plans to prepare for the UK's departure from the EU.
• While banks are planning to take steps to minimise the impact of a 'hard Brexit' on the provision of client services and disruption to the market, these are interim mitigating measures. Absent a permanent regime of full equivalence, these measures will not fully replicate the current ability of banks to service clients based on current access across the Single Market.
• During this transition period, banks will need to work closely with regulators and other stakeholders to agree a robust approach to facilitate the required structural transformation within a compressed timetable.
• Once the terms of the permanent relationship between the UK and EU are known, banks will need further time to put in place permanent solutions to comprehensively service their client base in the long term.
• The operational challenges of the industry seeking to novate and “re-paper” all impacted trades is at a level never contemplated before and will put enormous strain on the back offices of the impacted banks.
• Ongoing access to market infrastructure, including payments systems is, in many cases, dependent on an EU banking license. The criticality of this access for the day to day health of the global financial markets will need to be a key priority in any transitional and permanent solution. Regulators will have a key role in maintaining this continuity.
• Given the complexity and scale of the changes required, a transition period of at least three years would be needed to give banks (as well as other industry participants) time
Brexit transformation will be highly complex for wholesale banks and contains many interdependent activities. Firms providing a significant proportion of current industry capacity will need to execute transformation programmes which will extend beyond Article 50 timescales and in many cases up to five years, or even longer.
Banks are currently proceeding with tactical plans to maintain continuity of service.
However, as these plans are likely to be sub-optimal for clients and market effectiveness, the importance of an early view on the likely terms of exit for financial services is paramount.