Insights and News /

27 July 2016

Brexit: Which Retail and Commercial banking services are built on the premise of EU membership?

JPMorgan CEO, Jamie Dimon, warned Brexit would constitute a “massive dislocation” to London’s financial hub, reversing decades of growth for international banks and scatter them across Europe and the rest of the world. He also predicted Brexit would result in UK-based banks no longer being able to sell services throughout the EU.
What are the potential regulatory implications on retail and commercial banks providing key products and services?

Personal loans, mortgages and payment services

  • the majority of UK retail consumers obtain purely domestic banking products so the loss of cross-border services might not be significant
  • Brexit may positively influence the complex consumer credit regulations. There are two regimes for consumer loans; up to £60,260 fall under the Consumer Credit Directive and a separate regime for above that amount. Combining these would remove significant duplication inefficiencies
  • cross-border payments may be affected depending on the UK's ability to maintain its membership of the Single Euro Payments Area (SEPA).  SEPA provides a harmonised, common market for quick and efficient payment processing between members. It also risks missing future developments in areas such as cross-border real-time payments as well as UK banks’ competitiveness as a payment provider for international trades
  • Brexit could mean restricted EU market access for UK payment service providers, resulting in providers who are not authorised credit institutions within the EU needing to establish a separate legal entity as a payment institution within the EU.  This entity would then need to be authorised under the Payment Services Directive (PSD) in the relevant Member State. Timescales involved in this process could be protracted, resulting in UK banks losing significant market share
  • Brexit has the potential to broaden commercial consumers’ international trade interests, resulting in an increase to cross-border (non-EU and Euro) FX transactions and services
  • the UK mortgage market could be negatively impacted due to increased public conservatism and caution, as well as falling housing prices. Banks will need to be alert to signs of increased credit risk in the market and consider implications on their balance sheet of reduced new lending.

Packaged retail products

  • the UK’s post-Brexit approach to retail regulation will determine if the Packaged Retail and Insurance-based Investment Products (PRIIPs) key information document will be retained. To remain competitive with the EU, the UK should ensure investors receive at least the same level of protection as the EU Member States
  • however, these regulations are burdensome so it is possible that the UK might decide not to implement the equivalent national legislation, or may implement it with amendments.

Deposit taking and lending

  • the Capital Requirements Directive (CRD) allows deposit-taking institutions to conduct services throughout the EU using their home-state authorisation
  • if the UK does not retain European Economic Area (EEA) membership, UK banks will require new licenses in multiple EU jurisdictions to carry out these services (providing they are granted equivalence status under CRD). Time implications cannot be underestimated, as the respective regulators are likely to be under-resourced initially to engage across the EU. This would also similarly affect, UK branches of EU banks.

Brexit may mean a fracturing of Europe’s financial industry and shifting some business away from Europe’s financial capital may well be necessary, given the potential regulatory implications. One thing is certain, banks need to consider the potential impacts quickly and build in sufficient optionality and flexibility to ensure they are not caught at a disadvantage now the government is taking steps to leave the EU.