Contingency plans for Brexit: What should financial institutions do?

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Julien Courbe Principal, Financial Services Leader , PwC US May 03, 2017

US financial institutions, like many other organizations and industries at home and abroad, may think they’re done with the heavy lifting on Brexit scenario planning. Many have made their plans, lined up support, and now they just need to see how the negotiations turn out. Right?

Not really. The triggering of Article 50 simply opens a new phase.

For US firms with European operations, it still comes down to expecting the unexpected. Just recently, UK Prime Minister Theresa May called a surprise early election, arguing it could strengthen her hand in negotiations. Time will tell. In France, after the first round of the presidential election, two political outsiders are pitted against each other. For now, the more mainstream candidate seems to have the upper hand. More elections are scheduled across the continent this year. How will the results affect US firms?

As we noted in a recent paper, the environment continues to change. The best plan is to keep updating the plan.

Best laid plans?

Earlier this month, the Bank of England’s Prudential Regulation Authority (PRA) told all firms with cross-border activities between the UK and the EU to submit summaries of their Brexit contingency plans by July 14. It’s all starting to feel very real.

While negotiations between the UK and the EU could have a range of outcomes, financial firms should focus planning efforts on a “hard Brexit.” Let’s look at what this means in practical terms.

To move or not to move?

It’s clear that, as part of their contingency planning, US financial institutions are thinking about relocating some of their operations to EU cities. Frankfurt, Paris, Amsterdam, Dublin, and Luxembourg all have been mentioned as potential destinations. It’s certainly too soon to know if a given city will benefit from Brexit, but it’s not too soon to evaluate some options.

The European Central Bank (ECB), which grants banking licenses in the euro area and assesses acquisitions, recently reminded prospective applicants that it usually takes six months to decide on proposed relocations. And, in case you are considering getting a head start, the ECB cautioned that “the requirements for a well-functioning bank must be in place before (carrying out) any banking activities in the euro area,” and that creating an “empty shell” company won’t count.

That is not the question

At the same time, London continues to offer unparalleled opportunities for financial services firms: availability of skilled labor and support services, cultural and educational resources, and a concentration of the world’s financial services entities already long established. The City of London has recognized the importance of keeping financial services in London and made it a top priority to achieve a sector-based deal for financial services companies.

So the issue isn’t whether London will still be London, or whether it’s time to pursue new licenses. Perhaps the main question any firm should ask themselves is: what do you want to accomplish in Europe?

What matters most

It’s a cliche that crisis brings opportunity. Still, most firms shy away from the hard work involved in rethinking their business models. In fact, Brexit gives everyone a rare chance to step back and rethink priorities. How should you organize your facilities? Where should you route your business? Do all of your current offerings still makes sense in a post-Brexit Europe?

We’ve been helping a wide range of financial institutions prepare for Brexit, and it’s clear that some strategies work better than others. For example, we recently issued a report, commissioned by the Association for Financial Markets in Europe (AFME) outlining the activities financial institutions are taking to adjust. The report makes it clear that there is more work to do—and that Brexit transformation programs vary considerably across firms. Some may get the work done within two years. For others, implementation could take four years or longer.

Don’t be distracted by the media attention paid to the horse race among European cities. Yes, the clock is ticking, but you need to first decide what kind of business you want to conduct in the region. Then, and only then, should you analyze what benefits your firm could get by expanding elsewhere in the EU. Once you’ve thought through what your firm structure should be, your location strategy should become clear.

For more information on PwC and Brexit, visit our US Brexit hub. Learn more about industry news by following @juliencourbe and @PwC_US_FinSrvcs on Twitter.

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Julien Courbe

Principal, Financial Services Leader , PwC US

Tel: +1 (646) 471 4771

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