I was asked recently by PwC to present to an audience of insurers and asset managers on Brexit. To prepare for the talk I reached out across my network and am grateful for comments from RSA, Shroders, Aberdeen Standard, Chubb and Aspen amongst others. Below are key messages.
What has the market been working on?
There seems to be an acceptance that existing passporting rights for financial services firms will cease once the UK leaves the EU (with or without a deal). As a result, firms have been setting up companies within the EU27 to enable them to continue to service customers based in the EU post Brexit.
At its most basic, this has required treasurers supporting these new companies with new bank accounts (which we know is no easy task).
More complex is the setting of new capital and liquidity structures to support these businesses and as part of this restructuring, many treasurers have been involved in discussions with relevant regulators to ensure their capital and liquidity plans are adequate. One thing I have discovered is that many companies have had to increase the total amount of capital required, as it is not a simple question of separating out business and re-allocating capital, as different jurisdictions have different capital requirements. Liquidity requirements also need to be amended to reflect the differing markets they are now expected to support and the views of the local regulator.
Treasurers also seem to have been involved in the necessary internal restructurings that have taken place. Firms have needed to move staff to EU27 jurisdictions to ensure that their new companies have sufficient substance to satisfy the needs of the regulator. This has ranged from changes to teams providing information (e.g. two Financial Planning teams, two Client Money teams) through to the treasury team itself moving overseas.
Treasurers have also been busy working with their banks to ensure their derivative contracts and legal agreements remain effective not only post Brexit but also to reflect how the banks have created new entities to support UK and EU27 businesses.
What’s the view of the regulators?
The regulators have been looking at Brexit through a number of different lenses.
One area of concern is over the liquidity risk with the regulator concerned that previous assumptions regarding withdrawals may need revisiting in the light of increased uncertainty arising from Brexit.
There have also been concerns over disruption to payments, though this has been downgraded following the announcement from the European Payments Council that the UK can remain in SEPA.
The biggest concern of the regulator seems to be over business and operational readiness. The regulator seems satisfied that the largest firms are business ready and have taken the necessary steps to respond to the loss of passporting rights. However, the real concern is over operational readiness. How well are the new structures performing? What happens when new business starts to take place using the new entities? How robust will the 1st and 2nd lines of defense be? Is the talent pool deep enough to ensure that the right quality of staff is available? I heard from one member of the audience that their recently appointed treasurer for their EU27 business had resigned after less than a year into the role.
What’s next for the treasurer?
Having completed the basic activities, the next challenge for treasurers – especially those working in insurers or asset managers seems to be embedding a robust controls infrastructure across their new organisational structure. In addition, the new structures need to be optimised and this will take time as it will have to respond to the external business environment. Finally, as the banks separate out their business into EU27 and UK entities, treasurers are having to build new relationships with their banks.
