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Emerging from the foggy uncertainty created by Britain’s vote to leave the European Union is the growing likelihood of a big-bank exodus from the City of London, an economically damaging consequence of a referendum whose result is likely to see the UK lose the “passport” privileges enjoyed by members of the European Union (EU).
250 foreign financial services firms currently operate in the City, according to industry champion City UK, however the attractive prospects that first lured the likes of Morgan Stanley, Goldman Sachs and JP Morgan to the City are now somewhat uncertain, in turn meaning that the UK’s historical position as European headquarter of choice for major banking groups is also shrouded in uncertainty.
Some major players, including HSBC and Barclays, have affirmed they are standing by their London bases, while mooting the possibility of establishing European subsidiaries or taking steps to relocate or even add a small number of roles across Europe.
Others, namely Aviva, have near entirely dismissed the operational and economic impacts of Brexit altogether, according to a statement from the UK insurer. Aviva’s CEO has since ratified these initial claims, telling investors that the business will not need to be restructured as it “does not rely on passporting for [its] EU business.” Meanwhile, the likes of JP Morgan and Morgan Stanley issued grave warnings ahead of the vote that thousands of jobs could be at risk in the event of a Brexit; a fear shared by analysts at fund manager Blackrock which estimates up to 110,000 City jobs could ultimately be displaced as a result of the UK’s shock decision to leave the EU.
The potential for disruption hinges on whether the UK can retain the passport rights to the single market it has long enjoyed. The country’s membership of the EU has until now allowed foreign financial institutions to set up legal base in the UK and freely export services to the remainder of the 28-member bloc.
Other factors have contributed to London’s success, namely its infrastructure, its cultural diversity, the critical mass effect and the ‘light-touch’ approach regulators have historically taken to market supervision. But, now, serious doubt is being cast over the City’s continued viability as the global, or even the European, centre of finance on exiting the EU.
“Unless the financial services passporting rules are resolved in the UK’s favour, then many large financial services businesses are likely to relocate to within the EU”, Nick Elwell-Sutton, partner at law firm Clyde & Co., told City AM.
Perhaps Citigroup knew something we all didn’t. Even before the referendum result, reports in Reuters revealed the US lender was planning to relocate its European retail banking headquarters from London to Dublin.
"From a strategic perspective for Citi, moving to a single pan-European bank is expected to reduce operational and regulatory complexity, capital requirements and cost," Reuters reported.
The UK’s retention of the passport will continue to be debated, but given the tone of the campaign, for Brexiteers the loss of the passport is a must. EU leaders have so far been clear that any future trade deal would only be made in the event that the UK respects the four freedoms which underpin the EU – freedom of movement of people, goods, capital and services.
The UK has been told by EU representatives that it cannot have the luxury of picking and choosing from this list – it is very much a set menu. The experience of countries like Switzerland and Norway proves this. Both are non-EU members which trade with the EU, and so they are required to comply with EU rules, and like it or not that includes the free movement of people.
In spite of Nigel Farage’s recent claims in Brussels that the UK will continue to trade and deal with the EU, even going as far as to say it will be the EU’s “best friend", the country’s political leaders cannot now reach an agreement with the union which satisfies the promises of the Brexit campaign. Given the dominance of anti-immigration rhetoric and the importance of the role it played in pricking the ears of Leave voters, the government cannot now yield on promises to curb the number of migrants entering the UK.
As such, it cannot backpedal and accept terms that allow free movement of people, which is to say that it cannot make any deal which would retain access to the single market.
Some remain hopeful that the upcoming Markets in Financial Instruments Regulation (Mifir) will see firms avoid this disruption. Under articles 46 and 47 of the regulation, many of the passport rights enjoyed by EU countries can be extended to non-EU countries and their domiciled financial services groups.
However, this does strike a hopeful, rather than a realistic tone.
After all, the Mifir provisions were written prior to the UK’s unexpected exit from the EU and so to simply assume that they will remain in their maiden state is to ignore the increasingly protectionist tone the union is likely to take following the damaging blow that Brexit delivered. Leaders in Paris and Frankfurt are also vying for the top spot in anticipation of the City of London’s demise, which would suit Brussels’ invigorated attempts at integration.
Other, perhaps more tangible caveats make this outcome more problematic still. Not all financial services are covered by the Mifir provisions, which limits the applicability of the new rules to firms operating out of London. Moreover, their applicability relies on equivalent standards of regulation.
The UK currently meets these standards; however, this is a situation expected to change.
Patrick Dixon of trends forecaster Global Change predicts “an orgy of cancelled directives, dumped rules and celebrations of new freedoms.”
The bonus cap has been unpopular among policy makers and bankers alike. A repeal of these rules by the UK in the wake of Brexit would be welcome cause for the EU to cry foul play, assuming a continuation of the current protectionist tone.
Banks, understandably, will take a cautious approach to post-Brexit planning, given the extent of uncertainty surrounding the future of UK-EU trade. Statements released by numerous banks in the wake of the referendum are marked for their guarded tone – “no immediate change” and “monitoring developments” are the blanket messages. If London-based Japanese banks are to be taken as a barometer of sentiment in the City, it will be US firms setting the pace and others following suit, according to reports in the UK financial press.
JP Morgan’s dramatic likening of Brexit to the smashing of a crystal vase is unlikely to comfort those in the industry with hopes of avoiding a relocation to within the EU. Significant cost and risk awaits the banks that do relocate; the only question left is where will they go?
This article is a piece of independent writing by a member of Procurement Leaders’ content team.