The Bank of England says that the United Kingdom has made positive “progress” on handling the risks of disruption to financial services likely to be caused by Brexit. However, it adds that there has been a lack of similar action from the European Union—despite the impending March 2019 deadline.

In its latest bi-annual financial stability report, the Bank’s Financial Policy Committee (FPC) believes that the U.K. banking system “could support the real economy through a disorderly Brexit,” and that Brexit risks “do not warrant additional capital buffers for banks.”

The report said the passing of the EU Withdrawal Bill, coupled with the Treasury’s plans for a “temporary permissions” system for continuing cross-border financial trade, had eased the “risk of disruption.”

“Progress has been made in the UK towards mitigating risks of disruption to the availability of financial services to UK-end users,” the FPC report reads.

The FPC says that it is continuing to monitor preparations to mitigate disruption to financial services that could arise from Brexit. 

But while the FPC says that progress has been made in the U.K., EU efforts are lagging behind. 

Commentary: Brexit business uncertainty remains

The ability of the U.K.’s financial services sector to address Brexit risks is at odds with the slow progress that the U.K. government and the European Commission have made to calm business woes over what the U.K.’s exit from the EU will mean for them.
In recent days, manufacturing giants Airbus and BMW have threatened to pull investment from the U.K. if a Brexit deal is not concluded quickly (or favourably), eliciting an expletive-ridden response from the U.K.’s Foreign Secretary, Boris Johnson. And on 29 June, following a further European summit, the EU’s chief negotiator Michel Barnier warned that “huge and serious” differences remain, adding that “time is very short,” stoking fears that U.K. Prime Minister Theresa May could opt for a “no deal” exit that could create even more business uncertainty. 
-- Neil Hodge

“As yet the EU has not indicated a solution analogous to a temporary permissions regime,” reads the report. “European Economic Area customers remain reliant on U.K.-based financial companies being able to overcome any future barriers to cross service provision. For example, by restructuring their businesses and transferring existing contracts,” it adds.

In April, a technical working group focused on tackling risks to financial services post-March 2019 was set up, jointly-chaired by the European Central Bank and Bank of England. But the EU has failed to come up with other temporary measures, according to the report. 

Last November, the FPC published a checklist of actions that would mitigate risks of disruption to important financial services. These included: ensuring the U.K. legal and regulatory framework is in place; having an implementation period to allow firms to maximise their own preparations; establishing actions to ensure the continuity of existing cross-border contracts; and establishing actions to avoid disruption to the availability of new financial services. 

The report indicates these issues have still not been properly resolved. Despite some success, the FPC’s Brexit risk register still has a range of “amber” and “red” warnings on progress toward ensuring there is a legal and regulatory plan in place once the U.K. leaves the EU. 

For the U.K., there is a single red warning on the continuing validity of contracts used to insure businesses making currency trades, for example, involving institutions in the U.K. and the EU. There are believed to be £29 trillion (U.S. $38 trillion) worth of such contracts (of which around £16 trillion/U.S. $21 trillion matures after March 2019) that could become “unserviceable” after March if action is not taken.

The EU, however, is facing three “red light” issues: two are on contracts and one is on clearing—the ability to finalise deals and trades across borders between banks, businesses, and fund managers.

Both sides also face amber warnings on the ability of banks and asset managers to continue providing other cross-border services, and over concerns relating to servicing EU/U.K. insurance contracts, as well as on the lack of agreement on the flow of personal data between the U.K. and the EU.