Brexit will become a reality when the UK leaves the EU on 29 March 2019. This will change conditions for cross-border trade in financial services to and from the UK. FI describes in this report its analysis of a number of significant economic and legal aspects related to Brexit. In order to streamline its analysis, FI assumes a scenario in which the UK leaves the EU without the future relationship between them clearly defined and the UK becomes a third country among others (a hard Brexit).
When the UK leaves the EU, British financial firms will become third country companies. They may continue to conduct business in Sweden through subsidiaries or branches that are domiciled either in Sweden or another country within the EEA. Due to the narrow EU regulations regarding equivalence, British firms will only be able to conduct very limited business directly from the UK. The extent to which Swedish firms can conduct business in the UK will be dependent on British rules, but there are strong indications that it will be possible to do so through subsidiaries or branches.
The supply of financial services is expected to largely remain the same for Swedish households and firms since British firms have announced that they will apply for authorisation within the EU to be able to continue to conduct business. There are also opportunities to find equivalent alternatives. The British firms also have only a small number of retail customers in Sweden. FI makes the assessment that Brexit will not affect consumer protection. One possible exception is related to contract continuity, where primarily in the insurance sector contracts with consumers can be affected.
For FI, it is important that consumers' interest are given priority. This means in particular that companies are required to ensure that no consumers are adversely affected and even that uncertainty about contract continuity is removed. Ultimately, it is the responsibility of legislators and supervisory authorities to protect the interest of consumers.
The general question is whether agreements entered into before the UK leaves the EU will be affected by the fact that the British firm may no longer conduct business. The European Commission, among others, takes the position that the firms have an obligation already before Brexit to ensure that the counterparty does not suffer negative consequences, but some market participants are calling for legislative measures at the EU level. The questions are being discussed by the European supervisory authorities, and FI is participating in this discussion.
In its analysis, FI notes that the clearing organisation London Clearing House Ltd (LCH) is very important for interest rate derivatives trading, which in turn is important for the Swedish financial market. More than 90 per cent of interest rate derivatives trading in SEK is cleared there. In a hard Brexit scenario, LCH will be a third country company and the conditions for clearing will change. Banks will no longer be able to use LCH for clearing of new OTC derivatives with clearing requirements. There is also uncertainty here regarding the requirements on contracts that have already been entered into. There may be inconveniences and added costs for Swedish banks. How large these will be depends on the alternative solutions for clearing that will be offered. There are also alternative solutions that the firms themselves can use. FI will follow and participate in the discussion and work to find solutions that meet the interests of a well-functioning financial market.
There is a risk that the preparations for a hard Brexit are generally insufficient. This risk is not specifically Swedish but rather applies to Europe in general. The current political uncertainty surrounding the Brexit agreement and an agreement on future relationships, in combination with a possibly exaggerated expectation that the Commission will adopt equivalence decisions regarding British firms, is creating risks of market disturbances at the international level in the event of a hard Brexit. Such disturbances could impair the Swedish financial market's ability to function properly. However, given that it is a known risk factor, companies should be able to handle and counteract the consequences of any market disturbances. Ultimately, appropriate policy measures can also be taken, primarily at the EU level. Both firms and government authorities can and should maintain customary preparedness to handle financial shocks. FI therefore assesses the risks for financial instability as a result of Brexit to be limited.
FI has not identified any particular need to change the law other than what has already been presented in the proposal that the settlement systems in third countries in some respects be considered equivalent to those in the EEA.
There are no signs that FI will receive a stream of new authorisation applications from British firms that want to relocate to the EU. If derivative clearing is moved to the EU, the volume at Nasdaq Clearing may increase, which would increase the importance of this firm for the Swedish financial system. This would probably call for more supervisory activities, but it is currently not possible to estimate the scope.