Financial services must continue to plan for a March '19 deadline

With 10 months to go until Britain leaves the European Union (EU), the financial services sector is past the point of no return for a Hard Brexit. The announcement of a potential transition period is not enough for firms to stop getting ready for March 2019. While there will be items on the critical path for a Day 1 ‘go-live’, careful planning could identify some items that can be done post March 2019 (Day 2) and will allow firms to pivot their strategy, should a transition period become a reality. In this blog, we will examine our rationale behind this.

The UK and EU agreed on the nature and timing of the transition

On the 19 March 2018, the UK and EU announced key details on a Brexit transitional agreement. The agreement provided clarity on a timeline for withdrawal and explicitly stated what the UK can do during this transition. Most significantly for financial services firms, was the agreement of a transition period beginning 29 March 2019 and ending on 31 December 2020.

There were additional transition agreements, which mean that the rights of businesses and individuals largely remain unchanged until the end of transition period. Indeed, the UK will be able to leave the EU but will remain in the single market and customs union until the end of December 2020. This will provide legal continuity after Brexit takes place on 29 March 2019, thereby allowing UK firms more time to finalise and execute their Brexit transition plans.

For financial services, a successful occurrence of a transition period will allow firms to plan for a Brexit transition ahead of December 2020 (a ‘Soft Brexit’) as opposed to transitioning ahead of a March 2019 deadline (‘Hard Brexit’).

But is the transition agreement guaranteed?

The short answer is no. The transition agreement is dependent on the Transition Treaty being signed ahead of 29 March 2019. The treaty consists of 2 elements (i) the ‘divorce’ settlement and (ii) the transition agreement – both of which are being negotiated at present.

How should Financial Services firms plan for this?

Scenario-based planning

Our view is that firms should continue to work towards operational readiness ahead of March 2019. At the current point in the timeline, there should be clear working assumptions on location, client impact, future product/service mix offering and the design of the target operating model. Firms should identify critical path items, versus items that can be done in Day 2 (post March 2019) and develop a pivot plan, should a transition materialise.

Sizing the effort

Firms need to determine the complexity and effort required to transition long lead time items. For a Brexit migration, the key items include (i) developing/replicating technology in the target EU location, (ii) re-drafting legal contracts & agreements with clients, (iii) arranging membership and connectivity to the relevant exchanges, clearinghouses, payment mechanisms, brokers, agents and custodians and (iv) end-to-end testing of technology and process in the new entity. Performing analysis on the change effort required would be regarded as ‘no regret items’ and contribute toward informing both Hard and Soft Brexit implementation scenarios.

Communication

Engagement with external stakeholders should continue or begin if not already started. For most firms, regulatory engagement has already begun and this should not lose momentum. Firms don’t want to risk being at the back of the queue for license applications, model approvals and other authorisations. It’s important to engage UK and EU regulators as well as the ECB. It is also critical to engage financial market infrastructure providers (CCPs, exchanges, custodians etc), both to understand service and commercial offerings, as well as the timetable for connectivity testing. Finally, meaningful engagement with clients should now begin. Early engagement with key strategic clients will enable firms to digest clients’ Brexit plans, and therefore mitigate potential client attrition.

Resource appropriately

Brexit change programmes will require change resources that have entity migration and post-merger integration experience. Many Brexit programmes are hoping to recycle existing change resources from completing change programmes like structural reform, MiFID II and GDPR. Some of these resources are likely to be diverted to other time-sensitive regulatory programmes (e.g. SFTR, GDPR post go live clean-up, etc). Additionally, these resources might not always have the complete spectrum of product or business knowledge to deliver Brexit. Early planning should include ramping up on scarce resources with the right skillsets so they are included in the planning/design phase and are secured for the crucial delivery execution phase.

Find out more about how Capco’s Brexit Toolkit can help you to be ready ahead of March 2019:

https://www.capco.com/Industries/capital-markets/Brexit-key-challenges-the-capco-toolkit

This is the first in a series of ten blogs which explore how key activities for a March 2019 go-live can be completed using innovative technology enablers and methodology. They also examine key Day 2 considerations, as well as insights from Frankfurt and Paris as receiving jurisdictions.

Watch out for the next blogs on:

• CCPs (what are the key impacts for CCPs, and clearing members)
• Tools of the trade (three blogs on innovative technologies FS firms are using to make their Brexit transition controlled, effective and cost-efficient)
• Technology testing (plan and execute functional, UAT, regression and end-to-end testing)
• Collateral optimisation
• Day 2 (what to consider post March 2019)
• A Brexit perspective from Frankfurt
• A Brexit perspective from Paris