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The Finished Article?

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Andrew GrayBy Andrew Gray, Global Financial Services Brexit Leader at PwC 





The Brexit timescale is dominated by the requirement to complete negotiations within two years from the invocation of Article 50 of the Lisbon Treaty, unless all member states agree to an extension. This two-year timeframe is dominating banks’ Brexit planning. 

The United Kingdom leaving the EU also comes at a challenging time for the European Union (EU) banking industry. It is still recovering from the financial crisis with ongoing restructuring work. This means that the potential upheavals that could result from Brexit further compound the challenges faced by the whole banking industry and its stakeholders. 

After collating information on Brexit planning from 15 banks that span a range of sizes, activities, origins and legal-entity structures, we were able to provide a granular view of the operational consequences of future UK-EU27 market-access scenarios, with particular focus on a “hard Brexit” scenario. These banks included banks headquartered in the EU27, the UK and non-EU countries in broadly even measure. This diversity was important so that we could obtain representative impacts from across the EU banking sector. 

Banks have to plan for a “hard Brexit”. 

While there are a wide range of potential outcomes from the Brexit negotiations, banks are focussing their planning efforts on a hard Brexit scenario. Banks cannot assume in their planning that the current market-access arrangement will continue as before, because should a hard Brexit scenario unfold, they would be at risk of regulatory breach and significant business disruption. 

To compound the issue, banks are also grappling with a complex array of concurrent regulatory reforms. There are critical implementation deadlines around MiFID II (January 2018) and for UK banks, the main provisions of the UK Financial Services (Banking Reform) Act (January 2019). The recently announced CRD V/CRR II and resolution package of reforms (which includes in the CRD a requirement for non-EU banks of a certain size and with two or more subsidiaries in the EU to have an intermediate holding company, or IHC) is also expected to be implemented around 2019-2021 and beyond, although these have not yet been fully determined. In addition, there are many other ongoing regulatory change programmes including those involving TLAC (total loss-absorbing capacity) issuance that banks will need to implement over the next few years. 

These implementation dates overlap with the timeframe for Brexit implementation, assuming that Article 50 is invoked in March as is highly expected. This overlap increases critical dependencies across different programmes of work, e.g. where technology solutions are required for both regulatory and Brexit purposes, as well as the risk of not meeting deadlines and thus causing service disruption. 

Bank transformation programmes  

Banking transformation programmes are notoriously complex, and some structural-change programmes delivered to date have taken four years or more. This is because banks are systemically important to the global financial system, and it is critical that they continue to operate without errors or disruption to support financial stability and meet the expectations of customers, regulators and other stakeholders. 

The reasons for lengthy implementation timelines include the complex nature of the products and services provided, the need to make granular changes to technology coding and the heavily regulated environment, all of which affect client interactions. PwC considered eight case studies of banking-transformation programmes in recent years that have taken longer than two years, and some are more than four years. These programmes typically cost many hundreds of millions of pounds and divert valuable resources away from business development and innovation, as non-discretionary investment and change dominate the agenda, senior management’s time and the focus of subject matter experts. 

Brexit transformation programmes will be further challenged because change will impact all market participants in the same period. 

All market participants will be seeking to respond to Brexit during the same time window. These participants include not only other banks, but also providers of market infrastructure, other financial-services institutions, regulators and banks’ customers. This is expected to increase the complexity of the change required as banks will seek to change their interactions with other organisations, which are themselves changing. It could also result in constraints in the availability of the resources on which banks will rely across Europe—such as staff with the required skills and experience, suppliers of professional services and regulator capacity—in responding to Brexit. This means that any planning timelines need to be constructed to allow additional lead times, as prior experience won’t account for this effect. 

Brexit transformation programmes have to manage the uncertainty that will continue throughout the withdrawal process.  

For a normal regulatory-change programme, the requirements are published by regulators and banks, then there is a window of time (often years) in which to implement them. In contrast, the terms of the UK’s withdrawal from the EU will be negotiated in the period following the invocation of Article 50, with exit occurring when the withdrawal agreement comes into force, or in the absence of agreement when the negotiation period expires. 

Banks will therefore need to implement their responses to Brexit while the terms of withdrawal are still under negotiation, and at the same time, comply with other ongoing regulatory developments—including for certain non-EU banking groups, the IHC requirement in CRD V. This, by necessity, requires banks to make assumptions about the likely result of Brexit negotiations and regulatory reactions to post-Brexit organisation. 

Further planning for Brexit 

Once the details of the final arrangement are known and there is greater certainty about the future relationship between the UK and EU, banks will need time to make additional changes to fully adjust to the new landscape. Brexit transformation programmes involve a broad range of activities. Some (non-Brexit) banking transformation programmes involve merely a subset of products and/or processes. 

However, adapting to the post-Brexit landscape potentially requires a wide range of interacting transformation activities. These include:

  • Restructuring legal entities,
  • Designing new ways of operating and transacting,
  • Gaining regulatory approvals,
  • Connecting to new market-infrastructure providers, such as exchanges and central-clearing facilities, which themselves may be undergoing a similar transformation process,
  • Moving staff into new premises and drawing up new contractual arrangements with suppliers and clients. 

Whereas every activity has the potential to be substantial, individually they are likely to be manageable. However, any Brexit programme that needs to combine multiple activities will face the inevitable coordination challenges of combining and managing a complex programme within a tight timeframe. 

Brexit transformation programmes vary considerably across banks. 

Some banks’ implementation programmes are achievable within two years, but others would ordinarily require at least four years to implement a realistically planned transformation programme. There is considerable variation in the required scope and scale of transformation activities required across different banks. This is driven by the banks’ legal-entity structures, European footprints and

customers served. It is therefore helpful to consider Brexit transformation planning for different categories of banks rather than consider the likely impacts for a typical or average bank. Banks can be grouped into three categories: 

  • Banks predominantly using a hub, which can be either in a EU27 country or in the UK but is typically in the UK, as a basis to serve clients across the EU. Such banks face the greatest structural and associated operational challenges. For them a realistically planned Brexit transformation programme would take at least four years. 
  • Banks with pan-European structures—typically banks that have wholesale banking and capital-markets activities and staff spread across legal entities located around the UK and the EU27—are better placed. They will still need to undertake considerable transformation activities in relation to their EU27/UK activities, but they should be able to implement the necessary changes within the two-year timeframe. 
  • Domestically focussed banks that require continued access to UK and EU27 markets don’t face the same scale of challenges as do banks predominantly using a hub structure. However, they nevertheless have a complex transformation task ahead. By virtue of the reduced scale of transformation activities required, a properly planed Brexit transformation programme could be completed in two to three years. 

Banks are not sitting on their hands.  

Banks are accelerating their readiness for Brexit by starting early with “no regrets” activities, such as retaining legal entities and premises that would otherwise not have been required. Within individual areas of transformation plans, there are a number of options for accelerating completion. Many of these are based on identifying where banks can use what they already have in place and minimising the extent of change required: e.g., moving the minimum amount of staff, at least initially. Some banks are also considering migration to a short-term or transitional way of operating in order to be ready for Brexit, then transforming further after the point of Brexit to achieve their chosen long-term preferred way of operating in a post-Brexit environment. 

Their plans are therefore dependent upon regulatory approvals for transitional operating arrangements. Such a two- step process necessarily compounds some of the challenges already noted, such as risks from acceleration and diversion of activity from business development and innovation. 

Timely completion of licence approvals is critical to meeting Brexit timelines. 

Most of the banks with which we have spoken will require fresh regulatory approvals even when continuing their existing activities (because the basis of regulation will change following Brexit). The approval process can be lengthy, sometimes taking over a year, and regulators will face a peak of approvals-related activity following the invocation of Article 50. As obtaining necessary approvals is a necessary step to further implementation, it is critical that this step is completed in a timely manner. Granting provisional licences on a timely basis will also enable the continued implementation of Brexit. 

All of the above puts the task facing banks into sharp relief. When the starting gun fires on Article 50, the hard work will truly start.


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