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UK banks have called for clarity over the validity of contracts that underpin €1.3tn-worth of their cross-border financial transactions after Brexit.

UK Finance and the Association for Financial Markets in Europe (AFME) issued a joint paper, Impact of Brexit on cross-border financial services contracts, insisting on prompt action to ensure contracts will be respected after 2019 to avoid “damaging impacts on business, additional costs for customers and disruptive economic effects” on both sides.

The paper follows concerns raised by the corporates and investors to the organisations.

“We get a lot of input from our investors, the banks, and this issue is clearly going up the agenda rapidly at the moment,” director of policy at AFME, Robert van Geffen explains to GTR.

“The issue also underpins market efficiencies and stability – so it’s a key area that should be focused on and is not getting the attention it deserves.”

The regulatory framework and passports that have enabled EU-based customers to access a diverse suite of cross-border financial products and services from UK-based banks (and vice versa) will cease to apply after the UK’s exit.

These services cross the breadth of financial services from lending and capital markets to risk management and foreign currency products and across all financial sectors including banking, payments, insurance and investment management.

Without a solution, each contract will need to be individually assessed to determine if its elements fall within a regulated activity no longer authorised under the EU passporting system, and whether the national laws of the member state where the customer is located nonetheless permit the activity, warns the paper.

This could lead to contracts having to be transferred, restructured or potentially terminated and businesses having to find alternative financing.

“If you look at the size of contracts that need to be grandfathered or re-papering to move to new entities – we are talking about many thousands per institution. This is an enormous exercise,” says van Geffen.

Call for transition period

The paper calls for a transitional period whereby both sides protect existing contracts, such as the EU-wide solution which was adopted to address uncertainty around the introduction of the euro and around the new regulations on OTC derivatives, central counter parties and trade repositories.

“There’s a lot of time pressure on the negotiations and getting it right. That’s why in the paper we ask for a transition period. If you have a transition period that continues existing market arrangements it will definitely help in getting the wording on any grandfathering approval right,” says van Geffen.

“The ideal outcome would be to have a joint declaration or a binding agreement between the EU and the UK. We would hope it could happen quickly because it should be a broadly binding statement without needing to go into detail on contract level.”

The warning comes after a third round of talks between UK and EU Brexit negotiators failed to make ground. Both sides have hit a deadlock over the divorce bill and are failing to make headway on key issues which need to be resolved before talks can move onto trade.

Commenting on the paper, UK Finance CEO Stephen Jones says: “Contractual uncertainty of cross-border contracts post-Brexit needs to be addressed promptly by all parties to avoid damaging impacts for customers on both sides of the Channel. This issue is wide-ranging and not just limited to banking, affecting cross-border products and services across payments, insurance and investment management services also.”