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UK markets regulators have announced further measures to ensure millions of financial contracts will be unaffected by Brexit, as authorities step up preparations to avoid financial turmoil should Britain leave the EU without any agreement.
The Financial Conduct Authority said on Tuesday it would introduce proposals for EU institutions with business in Britain to run down contracts such as life insurance policies or bespoke derivatives over the next five years, even if the companies have no plans to apply for a temporary UK licence.
EU insurance companies will have a grace period of up to 15 years to wind down or transfer their contracts with UK customers, the FCA said.
The FCA’s proposals for a no-deal scenario come as investors await the outcome of the UK parliament’s vote on Theresa May’s Brexit deal next week, which the prime minister is expected to lose.
The FCA’s move will allow European banks, insurance companies and online money institutions to continue operating in the UK — provided they are authorised in their home country — without breaking British laws.
They will be able to transfer property, rights or liabilities under a pre-existing contract but will not be able to accept new business after March 29, the FCA confirmed.
The regulator’s proposals illustrate the contrasting approach taken by Brussels and London to managing the financial system’s adjustment to Brexit. UK authorities such as the Bank of England have regularly warned about the possible disruption to continuity of privately traded derivatives contracts and the validity of insurance contracts in the event of a no-deal outcome. The BoE estimates that British households have about 16m insurance policies with EU institutions.
“This is a pragmatic solution to ensure European Economic Area [EEA] firms meet their obligations to UK customers. It would be beneficial to EU consumers if the EU could implement something similar in relation to UK firms,” said Paul Edmondson, a financial services partner with CMS, a law firm in London.
By contrast, Brussels has emphasised financial institutions’ responsibility to prepare for the worst, and it has generally avoided making commitments that would encourage the sector to assume that regulators would ride to its rescue. The EU has also viewed some of the UK regulators’ initial claims about derivatives markets and insurance contracts as exaggerated.
Nevertheless, Brussels has targeted preparations in some areas of financial markets, such as the continuity of business for clearing houses. It will also grant temporary exemptions to prevent disruption to thousands of uncleared derivatives contracts.
The BoE argues that financial companies alone cannot resolve some of the issues. As part of its Brexit preparations, the FCA on Monday also said it had opened applications for credit rating agencies and trade repositories to operate in the UK after March 29.
Trade repositories are data warehouses that provide authorities with information on derivatives trades and are part of regulators’ efforts to bolster global markets after the financial crisis.
Britain is the European hub for the big three rating agencies and five of Europe’s six trade repositories but they are overseen by an EU watchdog.
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