The City’s fightback against the EU’s Brexit warnings stepped up a gear today as Bank of England governor Mark Carney took to the field, warning that EU officials are not putting in sufficient effort to preserve financial stability post-Brexit.
The EU has not matched commitments by the UK government to allow European firms to continue to operate in Britain, Carney said.
The most urgent need is an agreement to secure a legal basis for contracts to continue to function once the UK leaves the EU. Derivative contracts with a notional total value of £96 trillion – which firms across the economy use to manage risks such as changing interest or exchange rates – are in danger, the Bank said.
The hazards around derivative contracts are “the biggest remaining risks of disruption” as the UK leaves the EU in March 2019 and could cause credit costs to surge, Carney said, speaking at the Bank’s biannual report on financial stability.
“The EU has not yet indicated their solution to these fundamental issues which would be expected to have more material impacts on the costs and availability of finance on the continent in the unlikely event of a disorderly Brexit,” he said.
Earlier this week the European Banking Authority provoked the ire of the City when it accused UK-based lenders of risking financial stability by delaying contingency actions. Financial Conduct Authority boss Andrew Bailey described the claims as “considerably wide of the mark.”
The rare overt criticism of EU regulators from Carney comes as the latest salvo in a barrage of warnings from business groups on both sides of the Channel that the lack of progress on Brexit negotiations risks damaging the economy.
Senior City figures have grown increasingly frustrated with the lack of efforts, amid concerns that political wrangling is jeopardising the fundamental underpinnings of cross-border trade and particularly the contracts on which firms rely.
Miles Celic, chief executive at TheCityUK, which represents the financial services industry, said: “The biggest barrier to addressing this issue is the EU regulators’ failure to accept and get to grips with the risk.”
“EU regulators need to explain what is preventing them from taking the reasonable steps necessary to defuse this risk to the European financial system. The time has come for European regulators to focus less on the negotiating ambitions of Brussels and more on the needs of customers.”
European businesses have also expressed serious concerns in recent days ahead of a crunch Brexit meeting between European leaders at the EU Council on Friday.
European services businesses have written to UK and EU negotiators to urge more progress, while Business Europe and trade union leaders joined UK counterparts in demanding more urgency to giving firms certainty.
The Treasury today laid out its technical plans to create a “workable legal regime” in case a Brexit deal falls through – although it emphasised a “no deal” scenario would be damaging for all concerned.
Firms will be able to trade in services across the Channel under the current Single Market rules until the end of the transition period, 31 December 2020, it said. British firms will have to continue to comply with EU rules during that period.
The temporary permissions regime will essentially allow EU lenders leeway to continue to serve customers in Britain, but a similar move from the EU side has so far not been forthcoming.