FCA backs short Brexit transition amid warning of no-deal challenges

Britain’s City watchdog has said it supports a short Brexit transition period, warning that a cliff-edge withdrawal could spark market disruption and hit consumers.

The Financial Conduct Authority (FCA) said a no-deal scenario could lead to “significant challenges” and cautioned that it could not guarantee to mitigate all of the risks, given this also requires action from EU authorities, “which has so far not happened”.

In a 30-page Brexit scenario report, the regulator said “consumers could potentially be affected if firms are unable to continue providing services or as a result of wider economic or market disruption”.

The regulator added that while the UK financial system is judged to be resilient to even the worst-case cliff-edge withdrawal, “some market volatility is to be expected in this scenario, but this should not affect the ability of markets to function effectively”.

While it stopped short of giving any support to Theresa May’s Brexit deal, the FCA said it has “consistently supported an implementation period to avoid cliff-edge risks” and that the “draft withdrawal agreement achieves this”.

In a letter to Treasury Select Committee chairwoman Nicky Morgan, FCA chief executive Andrew Bailey said a cliff-edge Brexit “would create significant challenges and risks in terms of firms’ readiness, potential market disruption and insufficient public-policy solutions put in place on the side of the EU”.

“Therefore … we strongly support an implementation period and we have consistently called for one to be put in place.”

But he also stressed that it would be better to keep the transition period under any deal “to a minimum” to avoid further uncertainty over the UK’s role and market access for financial firms.

The FCA’s report – which was produced at the request of the Treasury Select Committee – follows two separate assessments from Whitehall and the Bank of England on Wednesday, which painted a grim picture of the impact of a no-deal Brexit on the economy.

The Bank warned that Britain could be tipped into a recession worse than the financial crash, with an 8% cut in gross domestic product (GDP), unemployment surging by as much as 7.5% and house prices falling by almost a third.

A cross-Government analysis found the UK economy would be 9.3% smaller after 15 years if Britain leaves without a deal and falls back on World Trade Organisation rules, compared with remaining in the EU.

While the UK economy would continue to grow after withdrawal, Britain would be worse off under any Brexit scenario than if it stayed in the EU, the Government paper found.

Withdrawal under the plans set out in the Government’s White Paper would leave GDP up to 3.9% lower by 2035, according to the figures produced by officials from the Treasury and other Whitehall departments.