ECB Warns UK Banks to Speed Up Preparations for Brexit

Following the extension of the period under Article 50 until the end of January 2020, the European Central Bank (ECB) has urged banks in Britain to step up their preparations for Brexit, including plans for the possibility of a no-deal exit from the European Union. The ECB released an article on November 13 warning banks that by delaying the implementation of their plans for Brexit, they could face greater operational risks. The ECB noted that the delay to Brexit “should not be misunderstood by banks as a signal to further delay the implementation of their Brexit plans.”

They have called on banks to press on with implementing their plans for Brexit in accordance with the bank’s past commitments. These commitments included the timeline previously agreed with their supervisors, which required banks to ensure “substantial actions” had been taken by the end of 2020. These substantial actions are also included in the 2019 Supervisory Review and Evaluation Process (SREP) decisions, in which supervisors assessed and measured the risks for each bank and set them objectives to address the issues raised.

The ECB has found that many banks are delaying the transfer of customers and assets as well as delaying making vital changes to their IT systems, operations and organizational set-up. Many of the aforementioned changes and transfers require the involvement of third parties, and by failing to implement these changes and engage these third parties in a timely manner, the banks may be forced to scramble to implement large-scale, last-minute measures to meet the deadlines at the end of 2020. The ECB warned banks that by not following their previously agreed timelines, they run the risk of creating significant bottlenecks that could result in coordination failures.

While the ECB stated that they have seen “some evidence of progress by individual banks,” they noted that in certain areas of the ECB’s supervisory expectations, further action is still required. This further action includes:

  • internal governance,
  • business origination and access to financial market infrastructures,
  • booking models,
  • intragroup arrangements, and
  • IT infrastructure and reporting.

In addition, the ECB also noted that a number of banks are not making sufficient progress with the novation of uncleared cross-border derivatives contracts. They stated that this is due to factors including difficulties in negotiations with clients and banks’ reliance on contingency measures adopted at the national level in EU Member States. The ECB has encouraged banks to push ahead with these novations as well as the other substantial actions to “ensure that cliff-edge risks are mitigated rather than simply shifted to a later point in time.”