British regulators are examining a new kind of temporary authorisation for the thousands of overseas financial services groups that will need new licences to operate in the UK after Brexit.
Andrew Bailey, the head of the Financial Conduct Authority, said on Friday that the watchdog was weighing a number of options over how to deal with the deluge of companies that will need authorisations after the UK leaves the EU in March 2019.
The FCA will be responsible for approving financial companies beyond the major banks or insurers covered by the Bank of England’s Prudential Regulation Authority.
“If one firm that was using a passport came to the UK wanting to go through reauthorisation from day one with no transition period, that would be quite a task,” Mr Bailey told a conference in London.
“Authorities need to have a view on what’s practical and what can be done. There is more than one solution, but whatever solution is used, we need to have a clear focus as the clock is literally ticking.”
About 8,000 overseas companies use the so-called passport to have a presence in the UK, according to FCA data.
This compares with 5,500 City companies that passport into the EU. The passport is a feature of the EU’s single market that allows companies with headquarters in one country to seamlessly sell goods and services across the bloc.
Theresa May, the prime minister, has said the UK will leave the single market when it leaves the EU but a key question for negotiations will be how UK companies can retain access to it, and how European companies can have a presence in London.
Authorisations already take time at the FCA, even before the anticipated wave of new applications. The average time for the FCA to process an application is 23 weeks, according to its data.
Mr Bailey said on Friday that he was not sure how many of the 8,000 overseas companies would apply for fresh authorisation.
The PRA’s chief executive, Sam Woods, said this week that 130 EU banks had applied for a full British banking licence that they will need to continue operating in London after Brexit.
Mr Bailey also conceded that secondary legislation would be needed to create a new temporary authorisation structure.
He thought that so-called grandfathering, where companies keep their current approvals with no real vetting as they move on to a new regime, would likely not be appropriate.
Instead, the FCA would explore a time-limited permission that would allow the regulator time to vet each application properly before a full licence were granted.
Both Mr Woods and Mr Bailey have thrown their weight behind the need for a transition period to smooth the effects of Brexit on the City.
Time is of the essence for the financial sector: not only do companies need to think about their business structure if they do lose their right to a passport, but there are also questions about the validity of derivative contracts that are not yet resolved.
The BoE’s Financial Stability Committee warned this week that thousands of cross-border insurance and derivative contracts would have to move to EU subsidiaries of UK banks and insurers after Brexit — but there is not enough time to do this before March 2019 when Britain leaves the EU.