Clifford Chance

Time to adapt: Achieving an orderly transition for banking – an EU customer perspective

31 March 2017

In November 2016, UK Finance published its report Time to Adapt: achieving an orderly transition for banking. The UK Finance Report assessed the risks posed to EU financial services customers by a disorderly exit of the UK from the EU. It contained a detailed analysis of why a transitional framework for financial services is needed for banks and their EU customers, and how such a framework might be designed. This paper does not repeat that analysis, but looks in greater detail at the nature of the financial services supply chains that exist between the UK and the rest of the EU. It assesses the practical implications for EU-based businesses of changes to their ability to source financial services from the UK – especially if these changes are not carefully managed.

A formal exit of the UK from the EU is potentially as little as two years away, and with it the possibility for a dramatic overnight revision of market frameworks that have developed over three decades. A sudden and significant change in current rights to obtain financial services from UKbased providers poses the risk of serious disruption for EU-based businesses, giving rise to a damaging cliff edge effect. If banks and businesses attempt to avoid such disruption by preemptively restructuring operations and existing transactions that straddle the cliff edge date, this may involve costly, inefficient and potentially unnecessary change. While some providers may seek to move some operations into the EU, and other providers inside the EU may emerge, such significant changes in business mean that these will not in any reasonable timeframe be able to replicate the current depth and breadth of financial services provision.

Certainly, it is unlikely that such change can be soundly, prudently and transparently undertaken in the two-year period provided for in Article 50. This carries material risk for the large number of EU businesses that currently obtain financial services from providers based in the UK. The damaging cliff edge effect is not unique to financial services. Other economic sectors, such as automotive, pharmaceutical, engineering and telecoms are likely to experience new tariff and non-tariff barriers to trade in goods or services that disrupt commercial and economic structures built on the basis of the single market in goods and services.

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