The City has been told to “face the facts” that mutual recognition is not likely as a framework for trade after Brexit by a leading member of the Deutsche Bundesbank.
Andreas Dombret, who has been on the central bank’s board since 2010, told delegates at a UK Finance conference he was “sceptical” as to whether proposals put forward by IRSG and UK Finance itself were possible, noting that any future agreement “may very well be quite limited” - excluding free movement of labour and goods, for example.
He said the industry should prepare itself for a no deal for financial services “or other services, for that matter”.
Dombret said: “I am very much aware that this sounds like a worst case scenario... But it is time to face the facts. The point of reference has changed. Rather than clinging to an almost somewhat anachronistic point of reference,we must explore new approaches. And that is why we need constructive proposals from all sides, including the industry.”
He admitted it would be “inconvenient and it creates friction” but stressed full integration had not been necessary in the past and would not be necessary in future. “Innovation, growth, and close economic ties are possible even in a world where firms have to adhere to different sets of rules in different countries,” he said. “This competition of rulesets may even foster institutional innovation and diversity and may contribute to stability.”
However, now was the time for work to be carried out “to find pragmatic solutions under any kind of framework”, Dombret said, noting that “a lot of difficult tasks lie ahead of us, for financial firms as well as for central banks and supervisors”.
He urged bankers to recognise that the transition phase “is not a safety net” and that “timely preparation” was key to weathering the Brexit storm. “The economic consequences of insufficient preparation in the event of a hard Brexit would far exceed the costs of proper preparation,” he said.
Included within that preparation is establishing "at least basic entities" in the EU27 or vice versa in order to continue doing business across the channel. Having "letter box companies" - where the business is still effectively run from London - would not be accepted.
Dombret revealed that his team had increased its resources in European banking supervision and in national supervisory authorities.
"However, our capacities are obviously finite. Should there be a flood of applications at the very last minute, we cannot guarantee that we will be able to prevent capacity constraints that could prolong the application process," he said. "Therefore, I strongly advise banks not to slow down in their preparatory efforts because of a vague possibility of a transitional period."
Failure to complete these plans by March could leave firms "high and dry" one year later, Drombet said. He also used the opportunity to give European firms a stark warning, noting that some had still not contacted the PRA although they want to maintain their UK business after Brexit.
Stephen Jones, UK Finance chief executive, said: "On exiting the European Union, it’s entirely possible to use the tools and trust we have established during 40 years of membership to construct a new Free Trade Agreement that preserves some of the benefits of close alignment without sacrificing political and regulatory autonomy.
"Traditionally services were not covered in great detail within Free Trade Agreements but there is every reason why, in an increasingly service-based global economy, an EU-UK FTA should include an ambitious and credible model for cross-border trade in financial services.”