Though something of a soundbite, it seems UK prime minister Theresa May’s mantra of “Brexit means Brexit” is proving accurate, for financial institutions at least. As suspected, following the UK’s decision to leave the European Union (EU), an exodus from the City of foreign banks looks to be drawing closer.
It emerged recently that the City has submitted to the idea of losing currently unfettered rights to the EU’s single market. Politically speaking, given that most who voted to leave did so out of hostility towards the current state of immigration, the price to the UK of single-market membership —notably free movement of people— cannot be accepted.
A lot of foreign banks —250 according to City UK— have set up shop in the UK to take advantage of ‘passporting’ rights. These rights allow non-EU firms to establish legal base in one EU country and freely conduct business in the remainder of the bloc. Other factors such as its cultural prestige have undoubtedly contributed to London’s success as certainly Europe’s and according to some the world’s centres of finance.
But, as the UK begins the process of disentangling itself from the EU, the whole of the City’s appeal might prove to have been greater than the sum of its parts.
For businesses in most industries, the present degree of uncertainty means plans made now, prior an invocation of Article 50 of the Lisbon Treaty —after which time the two-year exit process will formally begin— may in future require a considerable degree of reworking or, worse, scrapping entirely.
However, in light of the UK government’s defiant if vague stance, reports by the BBC and other news organisations suggest the City has all but accepted its fate, which means alternatives to London might now be considered with real intent.
True, membership of the single market is not the same as having access to it. As the experience of other non-EU European countries has shown, though, neither will come at a snip and the latter – which implies playing by the rules without having a say in what they are – is unlikely to appeal to the UK. What’s more, there is currently no precedent for a third country (outside the EU or European Economic Area) having the full passport.
Japan is the first country officially to have weighed in on the debate. In a recent paper entitled Japan’s Message to the United Kingdom and the European Union, Shinzo Abe’s government makes a series of requests of the UK and the EU. The thrust of the paper is clear: while at pains to stress its respect for “the will of the British people”, there is a patent bend towards maintaining much of the status quo. Significant within a remarkably detailed message is the following statement: “If Japanese financial institutions are unable to maintain the single passport obtained in the UK, they would face difficulties in their business operations in the EU and might have to…relocate their operations from the UK to existing establishments in the EU.”
The paper acts as a hint not only to the UK government, but also to foreign businesses which have set up base in the country. In spite of doubtless cost and disruption, relocation is clearly not off the table. Japan is a major investor in the UK, therefore its comments must be taken seriously, perhaps even a reflection of wider sentiment. At the recent G20 Leaders Summit, it was made clear that bilateral deals with the UK are not a priority for other major trading partners.
In the absence of the all-important passport, a new base elsewhere in the EU may well prove a more attractive prospect than before. Prior to Whitehall and Brussels even initiating formal negotiations, the exit process has to officially be invoked. Brexiteers might be disappointed to hope for any time earlier than 2017 for this to happen. To commit to a relocation now would carry a large degree of risk and as such, at any rate on a wide scale, is unlikely. But, such a move would certainly avoid the lingering period of uncertainty —always the bane of business confidence— which at present the City faces.
This article is a piece of independent writing by a member of Procurement Leaders’ content team.
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