The UK could be left without a voice and forced to accept more than 30 pieces of new EU financial services legislation if the proposed implementation period is put in place along with the ratification of the Brexit Withdrawal Agreement, the Financial Conduct Authority (FCA) has warned.
In a response to a request from the Treasury Select Committee, published today (29 November), The FCA offered its assessment of the impact the UK's exit from the European Union, warning the UK faces "a number of risks...regardless of the form of exit".
The FCA explained that if Prime Minister Theresa May's controversial Brexit Withdrawal Agreement is ratified by Parliament and the UK enters into a transition period from 29 March 2019 to 31 December 2020, the country will "no longer be part of EU decision-making structures, nor will it be represented in the EU institutions, agencies and bodies".
The regulator said: "The FCA will therefore no longer be a voting member of the European Securities and Markets Authority (ESMA)."
According to the FCA, there are currently more than 30 EU legislative files relating to financial services under proposal by the EU.
It added that "it is not certain how many of these the UK will ultimately need to put in place" and the problem would be exacerbated if the UK and EU were to agree to an extension of the 21-month transition period.
While the FCA noted "some participation may be possible", it is not yet clear "how this would work in practice".
Further complications are added by the 2019 EU parliamentary elections whereby a new European Commission will be appointed and "typically set a new agenda and make new proposals", the FCA said.
However, the regulator caveated this could be beneficial from the UK's perspective because the new EC's agenda "would take time to be agreed and implemented, reducing somewhat the risk from new rules coming into effect before December 2020".
The FCA added: "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."
However, the FCA also reiterated its position on the consequences of a no-deal Brexit, adding "the risks presented in an implementation period are preferable to the risks of a no-deal scenario".
If the EU and the UK do not ratify a Withdrawal Treaty or any alternative agreement by 29 March, the UK would leave the EU with no implementation period.
For financial services, this means the UK would become a "third country" with market access determined under World Trade Organisation rules and EU or national Member State rules.
The FCA explained this would severely limit cross-border access as passporting would cease to exist.
In addition, the FCA warned, execution of firm contingency plans for a no-deal Brexit "could lead to market fragmentation and increase cross-border risk."
It added: "It will be difficult, ahead of March 2019, for financial companies on their own to mitigate fully the risks of disruption to households and businesses."
The FCA highlighted the potential harm to consumers of financial services in the event of no deal, warning they could be affected "either directly if firms are unable to continue providing services or indirectly as a result of wider economic or market disruption".
It added: "Over time market fragmentation could have a harmful impact on financial services' markets more widely, through reduced competition and increased costs for customers in both the EEA and UK."
In summary, the FCA said: "Leaving the EU creates a number of risks for us regardless of the form of exit.
"The implementation period helps address these at the cost of a lower ability to influence regulation during that period, for example due to the removal of our voting rights.
"An exit without agreement would carry much higher risk and carry significant uncertainty for us and for firms.
"Against that background, and viewed through the lens of our statutory objectives, the draft Withdrawal Agreement and the outline political declaration are preferable steps."