Felix Hufeld, president of Germany’s financial services industry regulator, BaFin, told a London audience today that the UK’s decision to leave the European Union not only meant the EU was “set to lose its third-largest member”, but that it highlighted as well the “deviation from the long path of ever more Europe” that began on 23 June of last year, when Britain voted in favour of leaving.
In his speech, which came during an event organised by Zeb, the European financial services consultancy, Hufeld, pictured above, underscored the interdependence between the UK and the EU that he noted renders harder the negotiations around future market access – for example, as the issue goes beyond these faced by the financial sector.
After five rounds of negotiations, he pointed out, Brexit negotiators have still “not made sufficient progress” on key separation issues.
“We have to assume that the UK will not be a member of the common market, or anything close to it following Brexit,” he added.
“There are only 18 months to go before it happens, possibly leading to a cliff edge situation.
“Since we do not know, like everybody else, what will be the situation in 2019, we have to think in terms of scenarios. We hope for the best and prepare for the worst.”
In the view of the BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) president, regulators will need to find solutions to what he said will be dangerous distortions at the entry to the post-Brexit world.
Some things can be tolerated at the start, to avoid the cliff-edge effects, but an appropriate balance must be found in the medium term, Hufeld went on.
Insisting on BaFin’s mission of setting up safeguards to protect financial stability, Hufeld said that the German regulator has clear expectations about the banks that wish to move to Germany.
Empty offices and mailboxes in place of offices will not be accepted, he said– UK banks planning to have a presence in his country will, he warned, need to split their entire ecosystem, including human resources, capital and infrastructure.
Recognising the amount of efforts this will represent for financial institutions, however, Hufeld noted that some non-core back office facilities of banks seeking a German base could remain in London for a limited time period, in order to give them time and space to carry out their relocation.
Also, he said, Germany will allow the continued use of internal models authorised by the Prudential Regulatory Authority for a limited time period, and under certain conditions.
Relocation plans ‘by early 2018’
Hufeld said he expects most financial institutions will have unveiled their relocation plans by early next year. For now, though, he argues that it is still “premature” to speculate on the capital requirements that will be needed post-Brexit.
Asked what he thought the impact of Brexit would be on consumers and businesses, Hufeld said: “It is crystal clear that whatever Brexit will be, it will cost to both British and EU consumers. Thinking that Brexit will be a cost-free incident, at least over the next few years, is unrealistic.
“We will all pay a price for Brexit.”
On the positive side, though, he noted, is the fact that the European regulatory community regard one another with a high degree of trust, and have known one another for years, which he indicated can only be good for the negotiations ahead.
Zeb partner and managing director Bertrand Lavayssière also addressed the Brexit issue in his remarks, noting that it from his company’s perspective, the post-referendum period has been “a bumpy ride”.
Two issues dominate his company’s clients’ concerns, Lavayssière said: the amount of capital needed post-Brexit, and governance issues, since Brexit may result in the implementation of two different regulatory regimes for financial services for companies that until now have needed to handle just one.