Brexit and prudential
reporting implications

Andrew Pilgrim and Nick Grist, Ernst & Young LLP

Andrew looked at the rapidly diminishing amount of time before the UK is due to leave the EU on 29 March 2019 and the difficulties in ensuring that both sides can ratify a withdrawal agreement in time. The key dates and opportunities for a withdrawal agreement to be negotiated and ratified are highlighted in the diagram below:

Following the conference, on 14 November 2018, Theresa May’s cabinet agreed the contents of the provisional withdrawal agreement with the EU. On 25 November 2018, the EU Leaders approved the withdrawal agreement in Brussels. The withdrawal agreement will be laid before the British Parliament for a meaningful vote to approve the agreement.

Andrew went on to reiterate that there is still a lot of uncertainty at this juncture. He talked through a number of the potential outcomes that are still possible as the political landscape evolves.

For financial services firms, most are now preparing on the basis that there is “no deal”, meaning the provision of cross-border services will be restricted and access to market infrastructure threatened. Whilst measures to mitigate the worst aspects of no deal are now being discussed by both the UK and the EU, these will not allow firms to operate without change and will only be temporary. Firms will need to plan their response across a range of issues, including the impact on prudential reporting.

Nick then delved into the implications for prudential reporting by reminding the audience that currently many European Economic Area (EEA) financial services firms undertake activity in the UK on a cross border basis or through a branch using passporting rights. If no withdrawal agreement is ratified by both the UK and the EU, these rights would fall away at the end of March 2019 and these firms would not legally be allowed to provide services in the UK. To avoid disruption, the government will run a Temporary Permissions Regime (TPR) where firms can continue to offer the same services (but not new ones) for a maximum period of three years.

Nick the following observations for EU based firms operating in the UK:

  • Third-country status applies on entry to TPR
  • Firms expected to comply with third country rules on entry. Nick emphasised that firms should plan for this scenario
  • Firms should assess reporting impacts, noting a potential risk on liquidity (PRA 110), single customer view (SCV) and notification changes for close links and controllers
  • Consulting is via CP26/18 with responses due by 2 January 2019

In the long term, the UK regulators will ‘assess the potential impact that international firms may have on UK financial stability and adjust the intensity of our supervisory approach accordingly.’

Nick then went on to elaborate on some pronouncements by the PRA that are applicable to all firms:

  • The PRA will not be making line by line changes to existing reporting requirements at this stage but have clarified some definitions and eligibility rules
  • There are multiple small changes in reporting templates (e.g. SCV now excludes deposits held by UK firm’s branches in EEA, FCSC no longer covers non-UK deposits and field definitions for COREP have changed)

For UK firms carrying on activities in the EEA post-Brexit through the formation of subsidiaries, there are a number of key points for implementation to consider: