Financial services firms should ready themselves for four key changes as the UK leaves the European Union

Whether you’re a Brexiteer, a Remainer or don’t know what to make of it all, you cannot have missed the almost constant media coverage of the last year and the unfolding events of the UK’s transition and separation arrangements for leaving the European Union. Like all sectors, banks and insurers have to brace themselves for the challenges, opportunities and changes created by Brexit. This is applicable for UK banks and insurers working into Europe, as well as for European and global banks with operations in the UK. 

At the time of writing, initial agreements have been reached on some important separation issues and talks are now moving on to the future relationship between the UK, the EU and its member states. The BBC guide is a good introduction to Brexit and the IGS guide sets out the current position for financial services (FS).   

The coming months of negotiations on trade and access to FS markets are critical. To replace the current ‘passporting’ arrangements and relatively free-market access, the EU negotiators have pushed for equivalence arrangements, which would represent limited and revocable market access for UK firms to EU markets. The UK wants a wider trade deal with financial services at its heart. The Government has outlined this would include special access arrangements, mutual recognition of regulatory regimes, alignment around common market and customer objectives, and monitoring of regulatory divergence.  

To put it simply, a lot of uncertainty remains as to what financial services will look like post-Brexit. 

So why should the changes be considered now by banks and insurers? Partly, because of the deadline and the time available to change. The UK is scheduled to leave the European Union roughly a year from now, on March 29, 2019 (a few months after the UK banking ringfencing deadline), and the transition period will run until December 31, 2020. The transition period allows business to get ready for the new rules and avoids a cliff-edge change in market arrangements. 

The other reason for looking at this now is that the implications and changes could be significant. The exact implications will vary between firms, and may change in the course of the next six months’ negotiations. But there are four change implications we put forward in our “Navigate the Change” report that banks and insurers can consider now. These are: workforce, passporting, investment and regulation. 

Workforce. Financial services employs more than a million people in the UK. Retaining this talent pool is critical to London’s position as a major financial hub in the global economy. Ease of access to EU talent and employee mobility are likely to be affected by Brexit. For many non-UK nationals this is a time of concern, especially for those with families now settled in London. The separation of teams and the relocation of operations to European destinations needs to be handled with careful organisation design and workforce management. As location strategies are worked through, leaders need to assess their current and future talent needs, paying attention to the most important priorities: retaining key talent through the transition, and managing employee data, headcount and positions. A clear and supportive change and communications strategy is required to reassure employees; this will be challenging for as long as uncertainty prevails. Finally, looking further ahead, employers will need to build up stronger educational links, and apprenticeship and employee development programmes to address skills scarcity, especially in London. 

Passporting. It is not yet clear how the current ‘passporting’ arrangement between EU regulatory jurisdictions will be replaced by new trade and financial services markets arrangements. What is clear is that if a new trade deal for financial services is not reached (with WTO terms as a fall-back), market access and operations would be significantly restricted. A number of firms have started to move selected operations to hubs inside the EU, such as Dublin and Frankfurt, in order to maintain market access through European subsidiaries. As they do this, FS firms may need to segregate operations, systems and data to allow for these new operations to be established, often with a period of coexistence while the new operation is scaled. As for ringfencing, there will need to be clear segregation of governance, decision rights, risk controls and ownership, contracts, structures and roles. But like all structural changes, this can be used as an opportunity to simplify complex organisation design. Finally, the implications for customers of any transition to European operations must be carefully handled, including relationships, pricing and service levels. 

Investments. Global banks and insurers may have to rethink their approach to the investment of capital across all markets. Decisions on investments in the UK vs. other markets will come under more scrutiny and pressure based on UK macro-economic conditions and the UK market’s role in the strategy for these firms. In the immediate term, banks and insurers need to free up funding for the Brexit separation activities and consider the impact of Brexit on in-flight change programmes. 

Regulation. While the UK FCA and PRA regulators remain the same, the overarching direction from the EU will diminish. As part of a future trade deal the UK Chancellor has proposed ‘structured regulatory dialogue’ between the EU and UK regulators, including mutual recognition of regulatory regimes, alignment around common market and customer objectives, and monitoring of regulatory divergence. However, while regulatory outcomes may be aligned, there is likely to be some divergence over time in the means and rules. Developing an operating model, data and technology that are future-proofed for regulatory divergence, – supporting easy segregation without adding complexity – is a wise move now. For ‘in-flight’ regulatory activities in the change portfolio, re-assess whether these are ready for any future divergence. 

As for all large structural changes, such as ringfencing and the various acquisitions, divestments and joint ventures, Brexit-related change will need to be done against the backdrop of continuing to serve customers and making change investments to reduce costs, meet regulations, embrace digital and grow the business. Leadership teams (and their supporting functions such as HR, finance, risk, legal etc.) need to be ready and aligned to handle this change, especially in a joined-up way across UK and European entities. While uncertainty remains around some of the finer details of the transition period and separation, now is the time to start addressing Brexit across your bank or insurer today. 

To learn more, read “Navigate the Change.” 

To find out more about preparing your FS firm for Brexit, or to join us at the Change Directors Forum and People Innovation Forum in London, please contact me here, or on Twitter at @andyyoungACN.

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