The Bank of England’s warning that Brexit threatens trillions of pounds of financial contracts is falling on deaf ears in Brussels.
Valdis Dombrovskis, the European Union’s head of financial-services policy, dismissed an alert issued by BOE Governor Mark Carney, who said the U.K.’s withdrawal from the bloc put as much as 96 trillion pounds ($127 trillion) of derivatives contracts at risk. Where Carney called for U.K. and EU authorities to step in, Dombrovskis said the onus is on firms to Brexit-proof existing contracts.
“There doesn’t appear to be at this juncture an issue of a general nature linked to contract continuity,” Dombrovskis told journalists in Brussels on Wednesday. The financial industry’s preparations “can go a long way” to mitigate the impact on firms’ ability to continue servicing insurance policies and derivatives contracts after Brexit, he said.
With political progress in Brexit talks slowing, the BOE has become increasingly vocal about the need to avoid financial-stability risks when the U.K. leaves the EU next March. Carney said last month that the problem of “contract continuity” can’t be solved by the private sector, and the EU “has not yet indicated their solution to these fundamental issues.”
At issue is the ability of firms to continue servicing contracts if the U.K. leaves the EU with no agreement in place to ensure firms still have the authorizations they need to do business in both markets. Without those permissions, firms could be unable to carry out so-called life cycle events in derivatives contracts, such as trade compression; insurers could lose the authorizations they need to collect premiums and pay claims.
Sam Woods, head of the BOE’s Prudential Regulation Authority, said on Wednesday that the logistical challenges are significant. A large U.K. brokerage could have upwards of 4,000 direct clients in the EU, such as asset managers, who could represent thousands more clients who would all need to give their consent for contracts to be reworked, he said.
Dombrovskis questioned the notion that certain contracts were automatically put at risk. “Overall, even after Brexit, the performance of existing obligations can generally continue,” he said, so firms and supervisors therefore need to look at every type of contract separately.
Speaking to U.K. lawmakers, Woods underlined that he views the EU as misguided in insisting that the industry solve the problems on its own.
The comments made by Dombrovskis are “entirely consistent with what everybody from the EU side has said, which is that firms need to sort this out for themselves, and I just think that’s wrong-headed,” Woods said. “I think in the end that view will change, and I think the damage that will be caused if not fixed is going to be felt quite widely, and in no sense disproportionately in the U.K.”
The scope of the problem is also a matter of discussion in a dedicated working group set up by the European Central Bank and the BOE. When it was created in April, officials cautioned that the industry shouldn’t expect the group to come up with a fix, as this would be left to politicians.