According to a report complied by the law firm Freshfield, companies are making contingency plans based on a “worst case scenario” that no equivalence, passporting rights or other access regimes will be in place before the expiry of the two-year negotiation period.
The analysis, commissioned by TheCityUK, aimed to assess the legal impact of Brexit on the UK-based financial services sector.
The report found that the two-year period for negotiating Brexit, which was set out by the Article 50 triggering in March this year, will not be long enough either for the UK government to redefine its ongoing relationship with the EU or for firms to satisfactorily effect any required reorganisation and restructuring.
As a result, it recommended a “longer and phased” implementation period, which it said would be mutually beneficial for the EU and the UK as well as the financial services sector.
While companies within the sector as a whole said they aimed to keep as many activities as possible in the UK after Brexit, some of them are thinking about relocating some EU-client facing services to Europe. For others, the impact of Brexit may be mitigated by adopting alternative strategies and other forms of business organisation.
According to the report’s findings, UK companies want the government to focus on maintaining flexibility in cross-border employment rights and rights of residence after Brexit, as well as ensuring the security and cross-border transfer of data, access to and continuity of service provision by market infrastructure and mutual recognition of professional qualifications.
Freshfield looked into the different sectorial impact on the UK financial services sector and pointed out that banks could lose the ability to provide Capital Requirements Directive banking services to EU clients on a cross-border basis.
Meanwhile, consultancy is usually unregulated and therefore Brexit is likely to have only a secondary impact on firms’ activities.
However, the auditing profession is the most heavily regulated of professional services, and is likely to be significantly impacted by Brexit.
The report said that it is not clear whether the Financial Reporting Council (FRC) will continue to be recognised as a competent authority once the UK leaves the EU.
“Absent specific permissions, it is presumed that it would not. This could curtail significantly the ability of UK audit professionals to provide services to EU clients,” it said.
Moreover, it said there is a risk that there will be a period of several years after Brexit before any new agreement takes effect, during which time UK audit businesses will be excluded from the single market.
The study said a true mutual recognition of audit qualifications would be beneficial for the trade in such services within the single market, but pointed out that mutual recognition for auditors does not mean equal rights for them in all EU member states when compared to their local counterparts.
Furthermore, it said it was critical that the government took note of the importance of the professional services sectors to the UK economy, and urged it to ensure that trade in services is given appropriate weight in its negotiations.