Banks based in Britain have called for legal clarity over whether contracts that underpin €1.3tn worth of their cross-border financial transactions will continue to be valid after Brexit.
UK Finance and the Association for Financial Markets in Europe have issued a joint paper calling for prompt action to ensure that contracts providing cross-border financial services, ranging from loans to interest rate swaps, will still be respected after Britain leaves the EU in 2019.
The trade bodies said that both the UK and EU should prioritise this issue in their Brexit negotiations to avoid any damaging impacts on business, additional costs for customers and disruptive economic effects for the UK and the EU.
The paper’s publication comes as businesses fret about the lack of progress in negotiations over Britain’s exit from the EU. Several senior executives said they refused to sign a letter circulated by Number 10 seeking their support for the government’s approach to Brexit.
Britain’s departure from the EU is likely to mean the end of the current “passporting” regime for banks, which allows UK-based lenders to freely sell their services across the 27-member bloc.
There remains uncertainty over whether existing cross-border contracts, which support businesses’ critical functions like funding and risk management, will be allowed to remain in place. The paper said a significant proportion of these contracts extend beyond 2019, affecting UK-based banks serving EU customers and vice versa.
This issue is wide-ranging and not just limited to banking, affecting cross-border products and services across payments, insurance and investment management services also. Early action is essential to provide clarity that these contracts will continue post-Brexit.
Many of these contracts support EU exporting businesses and their financing, which are strong contributors to economic growth and job creation.
UK Finance gave the theoretical example of Europa SA, a mid-sized manufacturing company, which could face “a complex and potentially expensive process of restructuring” its credit facility, foreign exchange hedge and interest rate swap with a UK bank after Brexit.
The trade bodies said similar issues around financial contracts arose when the euro currency was introduced in 1999, but they added that there were ways to deal with the uncertainty.
One solution is to introduce a transition period that confirms the legal right of the contract for a defined period, to allow banks and their clients time to transfer or restructure contracts.
However, if contracts are affected and a large number of businesses are forced to find alternatives, then service providers may face limitations in their capacity to provide such replacement financial products and services on the same terms and at the same prices.