The Financial Conduct Authority (FCA) has warned of ‘significant risks' to financial stability that it 'cannot commit to mitigate' under a no-deal Brexit.
The warning was included in an update on the regulator's Brexit planning for three Brexit scenarios, delivered to the Treasury Select Committee at the request of its chair, Nicky Morgan.
In a covering letter, FCA chief executive Andrew Bailey (pictured) said: ‘The FCA has undertaken a large amount of work with other authorities and with firms and markets in order to mitigate the risks of the abrupt exit.
‘But our advice is the at there remain significant risks to our objectives which we cannot at this commit to mitigate, in large part because of our dependence on authorities in the EU to take action which so far has not happened.’
In its own assessment, the Bank of England yesterday warned that the immediate economic repercussions of a no-deal Brexit could be worse than those of the 2008 financial crisis, with GDP falling by up to 8%.
The warnings were delivered as Prime Minister Theresa May's Brexit deal headed to what appeared to be a decisive parliamentary defeat, with all sides jostling to predict what would follow.
While UK negotiators achieved a goal of signing the UK up to an enhanced version of the equivalence regime, which governs EU financial trade with non-member countries, Bailey warned that the current legislative programme meant the UK could end up a rule-taker for 30 different changes to sector governance over which it had little input.
‘The UK would no longer be part of EU decision making structures and the FCA would longer be a voting board member of the European Securities and Markets Authority (Esma) and thus no longer formally involved in decision-making,’ wrote Bailey.
‘However, should the implementation period be extended, the greater such risks become. The UK authorities can seek to reduce these risks by continuing to engage closely with EU partners during this period, but the amount of influence we can have is uncertain.'
Despite these reservations and the risks presented, Bailey still sees an implementation period as preferable to the risks of a no-deal scenario, provided its duration is as short as possible.
‘As the implementation period is extendable for up to two years by agreement between the UK and the EU, this could assist in helping to avoid further cliff-edge risks at the end of the period.
‘However, it will be important to consider the risks associated with any extension and to work during the period to avoid new cliff-edge risks arising.’