Brexit – banking on „enhanced“ equivalence?

Brexit – banking on „enhanced“ equivalence?

Even though progress has been made, banks are left with continued uncertainty about the timing and scope of the Brexit process. They still have to plan for different scenarios.

The EU Council has agreed to the political compromise reached end of march for a transition period until end of 2020. However, this compromise will only become formally binding once the exit agreement has been accepted later this year. If the negotiation process by which the transition period has been reached is taken as a precedent, then banks appear to be well advised not to rely on a timely and conclusive compromise between the parties.

In the meantime, the concept of “enhanced equivalence” has been brought up. Put simply, under an equivalence regime, market access would be grated based on regulatory regimes yielding similar outcomes, a close cooperation of the relevant regulators and agreed dispute resolution mechanisms. The current equivalence regulation would have to be significantly enhanced, as it does not cover all the required services and can be unilaterally revoked at short notice. Whether the parties will be able to agree a sustainable enhanced model by the end of the transition period appears anything but certain.

Blog series: Brexit

Creating Optionality

Even though progress has been made, banks are left with continued uncertainty about the timing and scope of the Brexit process. They have to plan for different scenarios and maintain as much flexibility as necessary in order to avoid excessive investments and disruption by staff relocations. Here are some suggestions on how to achieve these objectives:

  • We consider the availability of sufficient and skilled resources as well as the implementation of the suitable IT platform as the biggest risks regarding a delivery on time.
  • Key functions will need to be filled with qualified staff members either to be relocated or hired locally. The top-level of the organization will need to comply with the regulator’s requirements to avoid empty shell entities and to be able to act locally if it were necessary.
  • In order to ensure sufficient resourcing and know-how further down the organisation, we suggest to co-operate with local parties who are able to cover sub-processes of the envisaged setup: Starting from employing consultants and contractors with local experience and track-record, this could go as far as outsourcing operational processes to relevant parties. Outsourcing is offered e.g. for compliance, finance and regulatory reporting, HR or even security-operations services. Using these offering in a first step can help to mitigate staffing issues and ensure local know how, while maintaining upfront investments at a low level. Once there is more certainty on the final regulatory environment, these arrangements can also be adjusted / insourced, to better meet future requirements without time pressure.
  • A further reduction of implementation workload and risks can be achieved by (partially) relying on tried-and-tested software packages, which already include functionalities as required in the market environment. Our experience with implementation projects suggests that a successful implementation can be achieved in six to nine months, significantly reducing capacity and know-how requirements during technical design and testing. The software already has existing connections to the market and clearing infrastructure and enables for an outsourcing of the technical infrastructure (data-center, network, firewalls, etc.). PASS can provide immediate consulting and implementation support. with extensive experience from a variety of implementation projects with different business models.

“Hope for the best, but plan for the worst”

This is a statement frequently quoted these days. However, using the measures outlined above, banks are able to create optionality with regard to their investments and the initially required hiring / relocation. Fixed cost will remain low, and the operational setup can be adjusted to better meet the final requirements once they have been politically agreed.

In order to avoid a loss of business and a reputational damage, banks need to progress with the implementation measures now. Being ready, and being flexible to adjust as we go along will be the main challenge of the coming months.

Authors

Dr. Manfred Beinhauer has been working in finance and banking for over 25 years. After earning his Master and Doctorate degrees, he supported banks and financial services providers with regard to organizational matters and the development of controlling and accounting systems. Subsequently, 15 years at UBS followed in various management functions in Frankfurt, London and Zurich. He played a key role in the conversion of German sales and trading activities at UBS Investment Bank to a European booking model, thereby implementing a business model based on simplified market access. In addition to various regulatory projects (Mifid, ORC introduction, etc.), he also supported financial transactions and change initiatives to streamline corporate structures.

After his time at UBS, Dr. Beinhauer took responsibility for Hypotheken Management, the leading service provider in the area of Performing Loan in Germany. After the company was acquired by a new shareholder forming the largest service provider in the loan processing field in Germany, Dr. Beinhauer has lead the successful integration of Hypotheken Management. Now, based on his extensive industry-experience, he has moved on to build FinTeam.eu, a service provider for banks and financial service institutions which are forced to develop a new European business model after Brexit.

 

Asmus Christesen, a Business IT Professional and Business Economist, has been a member of the Board of Managing Directors of PASS MULTIBANK since 1995 and currently holds the position of the Chief Customer Officer. Prior to that, he worked as an IT manager at a Danish bank in Flensburg and Hamburg. Furthermore, he worked for two major banks in Northern Germany and carried out audits as an employee of the IT department. This also included the support of several foreign branches including the introduction of core banking solutions.

Picture credit: Shutterstock

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