Road traffic passes the offices of HSBC Holdings Plc and Barclays Plc in the Canary Wharf business, financial and shopping district in London, U.K., on Thursday, June 5, 2018. The owners of a Canary Wharf skyscraper leased to Citigroup Inc. are seeking to refinance the 661 million-pound ($882 million) loan used to buy it five years ago, two people with knowledge of the plan said. Photographer: Chris Ratcliffe/Bloomberg
© Chris Ratcliffe/Bloomberg

Banks and insurers do not now have time to rewrite all of the £26tn of derivatives and 36m insurance policies that may be disrupted by Brexit, a report warns.

TheCityUK, the financial services industry lobby group, said that unless the UK and EU agreed a deal to “grandfather” certain long-dated financial contracts with obligations extending beyond Brexit it could “lead to significant financial stability risks”.

The warning highlights the growing frustration among City of London executives about the slow progress of talks to decide what rules will govern access to financial markets between the UK and EU after Britain leaves the bloc on March 29, 2019.

While the British government has promised to legislate to prevent insurance policyholders and cross-border derivatives having their contracts voided by Brexit, no reciprocal offer from EU authorities has been made.

Once banks and insurers lose their passporting rights to provide financial services relatively freely between the UK and EU, they fear they could be legally blocked from honouring many of their cross-border financial obligations.

“We have been banging the drum quite loudly on this issue and our concern is the stopwatch is running down on it,” said Miles Celic, chief executive of TheCityUK. “Our concern is that it is now being caught up in a regulatory game of chicken.

“While service providers are preparing to take steps to mitigate the impact of the loss of passporting rights, it is highly unlikely that this will be adequate to fully address the contract continuity issue by March 2019,” he added.

Some insurers, such as Hiscox, have started transferring UK insurance contracts for clients in the rest of the EU to subsidiaries they have established there. This involves a court-approved procedure under Part VII of the Financial Services and Markets Act 2000.

But Mr Celic estimated that the procedure could take as long as “12 to 18 months”, adding: “There simply aren’t enough lawyers and there isn’t enough court time to address 36m insurance contracts.”

Drawing a parallel with EU legislation ensuring contract continuity after the introduction of the euro in 1997, Mr Celic said financial companies risked facing a post-Brexit choice between “either you don’t keep your commitment to your customer or you break the law”.

Some lawyers are advising clients that most derivative and insurance contracts should still be executable after Brexit because they will be protected by English contract law, the international law of acquired rights and the EU’s right to property.

Shearman & Sterling, the law firm, said in a recent note to clients: “The loss of ‘passporting’ rights and other freedoms under EU treaties should neither frustrate existing contracts nor render the performance of existing cross-border UK-EU contracts illegal nor cause them to be void or voidable.”

A problem could arise when banks do “netting” agreements to eliminate offsetting derivatives because this requires that a new contract be created. But Shearman Sterling said companies could deal with this by adding “reverse solicitation” permissions to contracts with all derivative clients.

Additional reporting by Oliver Ralph

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