In recent years, banks have seen a spate of regulation and structural change that has had major implications for many areas of their operations. Brexit has the potential to see even wider-ranging impacts.

Under a hard Brexit scenario with a two-phase transition, where UK entities must respond twice to changes in operating model and regulation, banks will need to implement significant change across the full range of businesses and support functions.

Against the backdrop of significant change that Brexit presents, banks are already dealing with the implementation of a raft of mandatory regulatory driven requirements. The prioritization and management of this large backlog of change across teams and applications that are intrinsically inter-related becomes complex and time consuming.

Most of the impact for operations will be driven by the way in which the model is defined to support the booking and risk management of transactions undertaken with EU clients.

According to EY, there are four primary models that may be used, namely:

• Agency trading
• Principal trading — back-to-back intraday risk transfer to the UK
• Principal trading — back-to-back end-of-day risk transfer to the UK
• Principal trading — full risk management in the EU

Each of these models have their own implications for how the EU entity would operate. While none of these booking models are new, the combination of models used will require a range of controls to ensure that all business and associated risk is being managed and closed out appropriately.

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The complexity that this creates will have implications for operations in a wide range of areas which will require consideration of questions around booking controls, regulatory reporting, client migration, management of settlement locations and settlement instructions cross entity reconciliation, cash and collateral management, network management, cancellation and amendment scenario, and training and talent.

• What does no-deal Brexit mean for the UK?
• What Would a No-Deal Brexit Look Like?
• What is a ‘no-deal Brexit’?
• Why Boris Johnson is considering a no-deal Brexit

What does no-deal Brexit mean for the UK?

Michael Gove has claimed that there is a 66% chance that the UK and EU will be able to finalise a Brexit trade deal, telling the Lords’ Brexit Committee on Wednesday that it is “emphatically not our preference” to leave the transition period without a deal.

Less than a week remains until Boris Johnson’s self-imposed 15 October deadline for finalising a deal, with Gove hinting that the UK plans to use the cut-off to speed up negotiations with the bloc.

However the UK’s negotiator David Frost said he was “uncertain” if a deal could be reached by the deadline, refusing to rule out the possibility that talks could carry on after.

“No one will be happier than me if we can conclude an agreement but we have an absolute obligation to ensure the country is ready in the event that we don’t,” Gove said.

While both sides insist a deal is still achievable, no-deal preparations continue to intensify.

“Those preparations are intensifying as we speak,” Gove said. “While we are obviously keen to get a deal, we will not do a deal at any price.”

So if the October deadline passes and the UK sets a course for no-deal, what might that look like?

What has happened?

In June, Johnson said there is “no reason” why the outline of a Brexit deal could not be sealed by the end of July, after he asked EU leaders at a video summit to “put a tiger in the tank” of stalled talks.

But this deadline passed, with Johnson in September informing the EU that a free trade deal must be done by 15 October, otherwise the UK will “move on”.

Sky News reports that the PM has said Britain is entering the “final phase” of negotiations, which resume on Tuesday, and that there is “no sense in thinking about timelines that go beyond that point”.

Whether or not this deadline will be met remains to be seen, but the UK government has previously responded bluntly to calls for a Brexit transition extension.

What has the UK said?

The UK is not willing to back down on fishing rights, so-called level playing field guarantees, governance of the deal and the role of the European Court of Justice, with each of these issues causing considerable stalling in negotiations. 

But No. 10 may have damaged its chances of securing a deal in September by proposing legislation to override key parts of the Brexit withdrawal agreement – a move which Environment Minister George Eustice claimed on Monday morning would merely tidy up some “legal ambiguities”.

The Internal Market Bill, which is due to be published on Wednesday, is expected to “eliminate the legal force of parts of the withdrawal agreement” in areas relating to state aid and Northern Ireland customs.

European Commission President Ursula von der Leyen called for Britain to stick to the terms of the original withdrawal agreement, describing it as the UK’s “obligation under international law”.

With talks progressing at an agonising pace, EU chief negotiator Michel Barnier is due to touch down in London to meet his UK counterpart Lord David Frost today, according to Sky News.

And despite the talk of no deal, Johnson has stated that “there is still an agreement to be had” and his government “will continue to work hard in September to achieve it”.

What does the EU want?

Speaking to the Today programme on BBC Radio 4 this summer, Nathalie Loiseau, the French MEP and former Europe minister to Emmanuel Macron, said that the EU is “ready either for an agreement or for a no-deal”.

She added that the bloc is “getting prepared more actively to a no-deal considering the circumstances”.

The EU wants the UK to agree to follow its rules on fair and open competition so British companies given tariff-free access to the EU market can’t undercut their European competition.

It has warned that the UK won’t be allowed a “high-quality” market unless it signs up to EU social and environmental standards. The bloc also wants the European Court of Justice to have legal powers to police any free trade agreement reached between the UK and EU.

Tariffs and quotas

If a deal can’t be agreed with the EU, then the UK will default to WTO terms from 1 January 2021. Every WTO member has a list of tariffs and quotas that they apply to other countries.

The UK would have to apply tariffs and quotas to goods coming into the country from the EU, and the EU would apply its “third-country” tariffs and quotas to the UK.

That means the UK would be hit by big taxes when it tried to sell products to the EU market. The bloc’s average WTO tariffs are 11.1% for agricultural goods, 15.7% for animal products and 35.4% for dairy.

British car makers would be hit with a 10% tariff on exports to the bloc, which could amount to €5.7bn per year. That would increase the average price of a British car sold in the EU by €3,000.

Currently, trade between the UK and EU is tariff-free. But the Confederation of British Industry (CBI) predicts that no-deal would mean that 90% of the UK’s goods exports to the EU would be subjected to tariffs.

Without a deal, it would have to trade with every WTO member in the world on the best terms it offered any member, including the EU.

Borders

In the event of no-deal, the EU would begin imposing border checks on UK products from 1 January 2021, even if the UK hadn’t changed any of its rules and regulations.

The UK government has admitted it expects massive border queues and persistent delays for six months or longer in the UK if it leaves without securing a deal.

France has said it plans to immediately implement post-Brexit border controls at its ports in the event of no-deal. The UK government has estimated that 50% to 85% of lorry drivers would not have the necessary documentation to enter the EU via France, says The Washington Post.

HMRC has estimated that British businesses would spend £15bn extra a year on paperwork in the event of a “no deal” Brexit, reports the Financial Times.

Economic impact

A small number of pro-Brexit economists say that most trade around the world is done on WTO terms, and the UK would still have access to the EU market, says Euro News.

But many other economists and academics say that crashing out and trading on WTO terms would be damaging for the British economy.

The head of the WTO has warned Johnson that standard trade terms “would slow Britain’s recovery from coronavirus, saying that sticking closer to present arrangements would be better for jobs”, The Times reports.

Roberto Azevedo, director-general of the WTO, said while WTO terms were “not a catastrophe”, they “will impose a number of adjustments and those can be painful, particularly for some sectors”.

The UK exports nearly half (46%) of its goods to the rest of the European Union, making it by far the largest UK export market. And over half (53%) of all UK imports came from the EU in 2018.

The UK’s economy relies heavily on its service industry, with British service providers making up 79% of the UK economy and accounting for 45% of exports. London’s position as a global financial hub would be threatened.

Non-EU countries

The UK crashing out of the EU with no deal at the end of 2020 isn’t just bad for UK-EU trade, it’s bad for UK trade full-stop, say some critics.

The UK could lose continuity of trade relations with many of the 72 countries that have trade deals in place with the EU, including Canada and Turkey.

Britain is in talks to continue its participation in those agreements, and has so far the government has secured continuity agreements with around a dozen countries.

No-deal would set the UK free from rule-taking

While a no-deal Brexit would mean the UK is no longer subject to EU rules, it would not mean that every rule the UK follows is made in the UK, says Full Fact.

“We would remain members of international organisations like NATO and the WTO, and membership of these things means following collective rules or decision-making,” says the fact-checking site.

And the UK will still be subject to the European Court of Human Rights after Brexit. This court isn’t an EU body, and the UK will still remain a member after the transition period ends.

What Would a No-Deal Brexit Look Like?

Prime Minister Boris Johnson, a staunch Brexiteer and a leader of the 2016 referendum campaign, will have just under a year to negotiate the terms of the United Kingdom’s relationship with the European Union, which it formally leaves on January 31.

Johnson’s cabinet has promised it will strike a trade deal with Brussels by the end of the year, and has ruled out extending the transition period. But experts are skeptical that trade negotiations can be completed so quickly, and warn that a failure to reach a deal during the transition period would have wide-reaching consequences.

Why would a no-deal Brexit matter?

First off, some economists worry that the British economy would sharply contract. In November 2018, the Bank of England predicted that the effects of a “hard Brexit” would rival those of the 2008 financial crisis. There are several specific pain points:

Trade. Leaving without a deal would mean immediately leaving the common market, which guarantees that all of the UK’s trade with EU members faces no tariffs or regulatory checks. British exports to the EU would face most-favored-nation-level tariffs, which average just under 6 percent but are much higher on certain goods, especially agricultural products.

There would also be new border checks for both exports and imports. This could result in higher prices, border backlogs and delays, and even shortages of staples, such as food and medicine.

When the prospect of no deal arose in the past, some British companies and citizens began stockpiling goods. Some of these concerns were addressed in Johnson’s withdrawal agreement with Brussels.

For example, no deal during the transition period would no longer lead to a so-called hard border between Northern Ireland and the Republic of Ireland, but rather to customs checks on goods traversing the Irish Sea.

Investment. Several international firms have shifted their investments from the UK to elsewhere in the EU, fearful that supply chains will be disrupted. Capital invested in the other twenty-seven members has grown by 43 percent since 2016, while the UK has seen a 30 percent drop.

Aerospace giant Airbus is a prominent example, vowing to direct funds and jobs away from the UK if there is no trade deal. Such moves could put tens of thousands of British jobs at risk.

London’s role as a world finance leader could also be in jeopardy if financial firms relocate to the continent. Financial services provide 11 percent of the UK’s tax revenue; 44 percent of their exports go to the EU.

Migration. The status of the 3.2 million EU citizens living legally in the UK, as well as that of the 1.3 million British citizens living in EU countries, has become a major controversy. Politicians have promised almost all will be granted “settled status” after Brexit, but anxiety remains.

Some Europeans have only been granted “pre-settled status” in Britain, and some British expats bemoan the fact that even with legal status in another EU country, they will lose their freedom of movement within the entire bloc.

Officials also worry about other potential security ramifications; a former head of British intelligence, Eliza Manningham-Buller, has argued that the UK will be less equipped to handle terrorism and Russian aggression, and UK police have warned that the loss of access to EU crime databases could undermine their efforts.  Proponents of Brexit argue that these fears are overblown.

What’s next?

The next eleven months will largely determine whether the UK will maintain close regulatory and trading ties with the EU or will prioritize trade with other partners such as the United States or the Commonwealth of Nations.

Much of the pace of negotiations will be set in Brussels and will play out according to a detailed timeline. On February 25, the EU will agree to a mandate for the coming trade negotiations. By July 1, the two sides aim to reach an agreement on fisheries.

And while the transition period officially ends on December 31, the last European Parliament plenary session that can sign off on a trade deal convenes on November 26, further shortening the amount of time Johnson has to negotiate.

If the two sides have not reached an agreement by then, and if the prime minister sticks to his promises and refuses an extension, a hard Brexit could once again be in the cards.

What is a ‘no-deal Brexit’?

In a no-deal scenario, the UK would immediately leave the European Union (EU) with no agreement about the “divorce” process.

Overnight, the UK would leave the single market and customs union – arrangements designed to help trade between EU members by eliminating checks and tariffs (taxes on imports).

No deal also means immediately leaving EU institutions such as the European Court of Justice and Europol, its law enforcement body.

Membership of dozens of EU bodies that govern rules on everything from medicines to trademarks would end. And the UK would no longer contribute to the EU budget – currently about £9bn a year.

Under both former Prime Minister Theresa May’s deal and successor Boris Johnson’s deal there would be a transition period until the end of 2020. This is to provide some breathing space, maintaining much of the status quo, while the two sides try to negotiate a trade deal.

How could no deal happen?

After Mrs. May’s deal was defeated, the Brexit deadline was extended to 31 October. To avoid a no-deal Brexit at the end of October, the UK government must pass the Brexit divorce plan into law, obtain another extension from the EU, or cancel Brexit.

Mr. Johnson was forced to write a Brexit extension letter to the EU after MPs failed to approve a Brexit revised deal by 19 October. However, the deadline will only be extended if all the other EU members agree to one.

Opponents of no-deal say it would damage the economy and lead to border posts between Northern Ireland and the Republic. But some politicians support no deal and say any disruption could be quickly overcome.

What would it mean for trade?

Under a no-deal Brexit, there would be no time to bring in a UK-EU trade deal. Trade would initially have to be on terms set by the World Trade Organization (WTO), an agency with 162 member countries.

If this happens, a type of tax known as a tariff-ill apply to most goods UK businesses send to the EU. Many companies worry that could make their goods less competitive.

Trading on WTO terms would also mean border checks for goods, which could cause traffic bottlenecks at ports, such as Dover. No deal would also mean the UK service industry would lose its guaranteed access to the EU single market.

That would affect everyone from bankers and lawyers to musicians and chefs.

What about the Irish border?

No-one really knows what will happen at the Irish border if there’s a no-deal Brexit on 31 October. In theory, border checks will be needed as soon as the UK leaves the single market and customs union.

However, neither the UK or Irish governments have said they are willing to install border posts.

What about the ‘divorce bill’?

No-deal supporters say the UK could avoid paying the divorce settlement agreed by Theresa May’s government.

That was widely believed to be about £39bn, although delays to the exit date mean some of it has already been paid and the latest estimates put it at about £33bn.

But opinion is split on what happens if the UK refuses to pay and there’s a possibility the UK could end up in an international tribunal.

Even if there were no legal consequences, refusing to pay could mean political fallout – lessening the UK’s chances of securing an EU trade deal in the future.

What does it mean for individuals?

Individuals could be affected in all sorts of ways. For example, if the pound falls sharply in response to no deal and there are significant delays at ports, like Dover, it could affect the price and availability of some foods.

There are also concerns over potential shortages of medicines. EU citizens in the UK can apply for settled status, allowing them to remain even if there is a no-deal.

UK expats in the EU are advised to register as residents of the country they live in, although no deal could make moving across borders more difficult. Traveling with pets will become more complicated and expensive. And European Health Insurance Cards (EHIC) would be invalid after a no-deal Brexit.

Why Boris Johnson is considering a no-deal Brexit

In an economy devastated by the impact of the coronavirus pandemic, Britain can boast at least one new boom industry — customs. By some industry estimates, which ministers do not dispute, as many as 50,000 people could find new work as customs agents, facilitating trade between Britain and the EU under new Brexit arrangements.

This army of form-fillers could soon start to rival the actual British Army in size. The party of Margaret Thatcher is now overseeing the unwinding of one of her biggest projects: the creation of a vast EU single market, where goods and services flowed unimpeded across national borders in Europe.

Lorry parks and inspection points are being created to facilitate customs controls between Britain and the EU. More than £350m is being spent to help companies in Britain overcome red tape spawned by Boris Johnson’s Brexit deal to enable them to trade with Northern Ireland, another part of the United Kingdom.

This is all happening to prepare for what the prime minister says is his preferred option of a tariff-free trade deal with the EU, when the Brexit transition period expires on December 31. But even that limited trade agreement is not a certainty.

As a crucial eighth round of EU trade talks take place in London this week, Mr Johnson is considering whether to inflict even more friction on trade between the UK and its biggest market by severing ties with the 27-member bloc at the end of the year with no trade deal at all.

David Frost, Britain’s chief negotiator, said ahead of talks with Michel Barnier, his EU counterpart, that unless Brussels respected the UK as “a sovereign state” — giving it freedom to chart its own economic destiny — then reluctantly Britain’s new existence outside the EU would start without a trade deal in place.

“If they can’t do that in the very limited time we have left, then we will be trading on terms like those the EU has with Australia. We are ramping up our preparations for the end of the year.”

An “Australia-style” deal is the euphemism preferred by the Johnson government to describe a relationship with the EU that does not include a free trade deal. Unlike a “Canada-style deal”, which abolishes tariffs but spawns a mountain of additional paperwork and customs checks at the new trade border, a no-deal Brexit would involve tariffs and quotas on British goods as well, making exports more expensive. Mr Johnson is reluctant to say how much this would cost the economy.

When asked why there have been no recent impact assessments of the government’s trade options, Number 10 says: “The economic impacts of our trade deal with the EU has been much debated in the last four years and there are many economic studies on this issue.”

The most recent official estimates in 2018 reckoned the UK would miss out on 4.9 percent of future income over 15 years if it left the bloc with a basic trade deal. Under a no-deal scenario, that would rise to 7.7 percent over the same period, compared with staying within the bloc.

Sam Lowe, a trade expert at the Centre for European Reform and an adviser to the UK government, says a no-deal exit would also complicate other aspects of Britain’s dealings with the EU, tarnishing relations for years to come.

But Mr. Johnson insists this would nevertheless be a “good outcome”, arguing that it would allow Britain to adopt its own policies free from meddling by the EU, which insists the UK must stay close to its rules that limit the amount of aid states can give to their domestic industry.

The big calculation for the prime minister in the coming days and weeks is whether “no deal” is worth the political and economic price — especially at a time when the economy is facing its biggest crisis since the second world war and Scottish independence is back on the agenda.

One EU diplomat says: “Walking away from the table and going for a no-deal will hit the UK economy and UK jobs much harder than the EU economy and EU jobs. One wonders whether this is really a negotiation or pure masochism.”

Fishing and subsidies On the face of it, a deal on a free trade agreement should be within the grasp of Lord Frost and Mr Barnier when they sit down for what are likely to be tense talks this week. Dominic Raab, foreign secretary, claimed last weekend that there were only two “outstanding bones of contention”: one relates to the distribution of fishing quotas, the other to a state subsidy control regime.

The mood has been soured by the revelation in the Financial Times this week that while Lord Frost and Mr Barnier are talking about future relations, Mr Johnson is planning to legislate to start overriding parts of the Brexit withdrawal treaty he negotiated with the EU last October — the so-called Northern Ireland protocol.

Mr Johnson has tried to calm nerves, reassuring French president Emmanuel Macron that the changes he has in mind are “limited”, but Mr Barnier will insist that the starting point for a future deal is full respect of the international treaty negotiated by the British premier and ratified by parliament less than a year ago.

On the substance, the issue of fisheries is seen by officials on both sides as totemic but solvable. Mr Barnier reiterated on Monday that Brussels has moved from previous “maximalist” positions on fishing waters and was looking to secure a compromise. “I think a deal is possible,” he said. “It is a question of goodwill.”

EU officials say the current UK proposals would effectively double the British catch, an outcome Brussels argues would devastate EU coastal communities. Brussels intends that this week’s discussions on fish will focus on governance arrangements for any future deal, given the current difficulties in making headway on actual catching rights.

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The real sticking point is the question of state aid: notably the insistence by Mr Johnson and his powerful chief adviser Dominic Cummings that Britain must be free to hand out state support to companies to help regenerate the economy after the Covid-19 crisis, to transform “left behind” regions and to put state “oomph” behind the British tech sector.

The irony of this demand is not lost on veteran diplomats. Kim Darroch, Britain’s former ambassador in Brussels and Washington, recalls how Treasury officials working for the Thatcher government in the 1980s designed the EU state aid rules precisely to foster fair competition and to stop other European countries engaging in a subsidy race.

“We were the biggest enthusiasts in the whole EU for a tough state aid regime,” he says. “People who were involved in devising that regime will have their jaws hanging open — or will be spinning in their graves — that this Conservative government’s big idea is to intervene to create a UK equivalent of Silicon Valley.” Downing Street insists it does not want Britain to become a “high subsidy regime”.

Negotiations are underway with Brussels about how such undertakings might be given legal force with an independent regulator. But it is the precise opposite of what many in Brussels feared would happen after Brexit. Debate initially focused on whether Britain would become an offshore “Singapore-style” economy, competing with the EU through low taxes and light regulation.

But Mr. Johnson, who needs higher taxes in a post-pandemic world to pay for spending programs in former Labour-supporting northern seats, has already reversed previous plans to cut British corporation tax and rates look set to go higher.