Brexit: Seven things for financial services firms and advisers to consider
Important guidance for financial services firms and advisers.
1. Focus on managing liquidity
The short period following the referendum decision has already seen market volatility. Even if and when this calms down, contagion risk will remain and may lead to deposit outflows or redemptions. Left unmanaged these risks could affect the solvency of financial institutions. The previous financial crisis is still a recent memory for many firms, and they will be able to reference past data to benchmark potential outflows and KPIs.
In order to mitigate this, institutions should:
- Monitor rating changes, share prices and other market data
- Look at liquidity KPIs regularly and make sure they remain fit for purpose and calibrated to the right levels
- Give their treasury function the resources they need (further specific considerations for treasury teams can be found here.
- Ensure their emergency contacts are up to date should they need to quickly get in touch with the right colleagues, home and abroad
- Re-check what central bank support they are eligible for
Brexit may mean UK firms lose the right to operate in EU markets. However, it may not be practical for large organisations to communicate their contingency plans. They may have plans to move their top company, IT functions and key staff to other jurisdictions (which would allow them to retain access to the single market).
3. Monitor and understand macro-economic conditions
Brexit is likely to lead to adverse economic conditions for some time. For example, early indications show Brexit is likely to have a negative impact on house prices and transaction volumes. This will affect lenders’ LTV ratios, commercial property portfolios and valuations (with the added audit implications around these issues). This is likely to lead to increased provisions and lower profitability. This might lead firms to look at their product lines, and in the extreme, the effect on their business model.
More widely, low yields, the possibility of negative interest rates and the potential for increased unemployment will amplify these effects. Firms need to ensure they have resources to monitor, manage and deal with the adverse effects on their portfolios and liabilities.
Firms may need to redeploy their resources and staff to deal with Brexit-related projects. This may mean less time, money and staff devoted to other special projects or investment plans. This will affect most businesses, so your supply chain, counterparties and competitors will all be dealing with their own challenges. Decision delay and paralysis will create a challenging environment for advising on the best course of action.
5. Conduct risks
As everyone wants to preserve the viability of their business, incentives to work around rules and principles on market conduct and how customers are treated (in other words conduct risks) increase. Firms should be aware of this, and remind colleagues to maintain the highest standards of behaviour. Similarly, staff should be able to discuss new and emerging risks.
Avoiding customer confusion as much as possible will be vital. For example, the Financial Services Compensation Scheme levels reference rules set by Europe, but it is domestically funded, therefore this protection will remain, and the Bank of England will still be the lender of last resort for UK banks.
6. Financial planning & investment advice: reassess suitability, documentation and working practices
Prolonged economic and political uncertainty, volatile financial markets and the search for yield, means clients will increasingly look to their professional advisers for guidance and advice. As well as creating a good business opportunity it also places a heavy burden of responsibility on the shoulders of financial planning and investment advisers, who will need to take special care to ensure they are managing their clients affairs diligently during these challenging times.
Firms need to be able to unambiguously demonstrate that they have acted in the best interest of clients. This period of uncertainty means advisers should consider reassessing recommendations to check whether advice originally provided is still suitable. Firms also need to review working practices to ensure there is robust up-to-date documentation to show that all professional, legal and regulatory obligations have been fully met. Contractual obligations need to be clear to all parties, especially in the area of portfolio review. And beware, a well-intentioned telephone conversation to reassure a client could end-up being construed as a specific personal recommendation, or in terms of creating an on-going duty of care.
Some EU laws will remain because they have been enshrined in UK law, some because they help us compete in foreign markets and for others, the future is less certain.
|The same||Needed for trade so will remain||At risk|
|IFRS 9||Bonus cap||Passporting|
|Audit directive||MiFID II (equivalence)|
|CRR and CRD|
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