A top official at the Bank of England has warned the government it has less than 12 weeks to agree a transition deal with the EU to prevent City firms starting to move jobs and business out of the UK.
Sam Woods, a deputy governor at the Bank, said City firms would activate their Brexit contingency plans if there was no deal on a transition period by Christmas which would mitigate the impact of a hard Brexit in March 2019. Woods also repeated his warning of the strain being put on the Bank’s ability to police the financial sector as a result of the changes firms needed to make.
In an annual speech to an audience of financiers at London’s Mansion House, Woods said City firms would become more complicated as a result of the restructuring they would need to undertake.
His remarks come after a letter he sent in April to 400 City firms to demand they inform the Bank of England of their plans for Brexit, including if there is a hard exit without any trade deals or access to the single market.
A “transition or implementation period” was the most important requirement, Woods said, as he warned that the further away an agreement is from Christmas, the less effective it would be in helping to reassure City firms about the changes they need to cope with Brexit.
While the government has acknowledged the need for a transition period, Woods added “the EU’s position on transition is not yet clear – despite some obvious risks to EU financial stability in its absence”.
“If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Firms would start discounting the likelihood of a transition in the central case of their planning.”
Last month Catherine McGuinness, who chairs the policy and resources committee at the City of London Corporation, called for urgency over the Brexit talks after its tally of official announcements from City firms about their contingency arrangements puts 9,770 roles at risk, with Frankfurt receiving more business than any other EU financial centre.
Woods said the first phase of contingency plans on jobs would be “relatively modest”, with most of the initial work on setting up new operations in the EU and receiving regulatory approval.
“Contingency planning is a sliding scale of increased commitment, investment and momentum through time. It much more prudent and prosaic than hovering over the relocate button or rushing to the exit door,” he said.
He said that retail banks based in the European Economic Area countries – EU member states, Iceland, Liechtenstein and Norway – which currently operate in the UK would need to set up subsidiaries, which are more stringently regulated than branches.
He also set out proposals that would toughen up the way UK firms with subsidiaries overseas manage their operations.
He was speaking alongside Andrew Bailey, his predecessor at the Bank who is chief executive of the Financial Conduct Authority. Bailey set out his concerns that people are not saving enough for their retirement and about the £200bn of debt in the consumer credit market, particularly high-cost loans, where he said he was “not convinced that we have an appropriate system in this country for the sustainability of such credit”.
Echoing his remarks to the Guardian last month, Bailey said the FCA could not solve the problem without co-operation from other agencies. He appeared to reject Labour’s call for a cap on credit card interest rates, under which customers would not have to pay back more than twice the amount of their credit card borrowings.
“Credit cards are a form of revolving credit, and we do not see it as practical to implement a cap in the way that is by comparison straightforward for fixed sum payday loans,” said Bailey.
A cap on payday loans was introduced in 2015 so that interest and fees cannot exceed 0.8% per day and if borrowers do not repay their loans on time, default charges must not exceed £15.
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