In this second part, I'll be taking a look at the implications of Brexit and the legal struggle that will follow for the Banks, should there be a mass relocation to the other financial capitals of Europe.
Brexit Consequences: Life Without a Passport
So what is life going to be like for UK-based banks, assuming there is no passport or equivalent services agreement?
A recent report by AFME, together with the Boston Consulting Group and Clifford Chance suggested that a hard Brexit could negatively impact small and medium sized enterprises' business and growth. Larger corporations were concerned about potential loss of efficiency - and fragmentation in conducting cross-border business.
In theory, EU banks could benefit from the lack of UK-based competitors, however, in the short term at least, their ability to increase lending capacity, is not only constrained but investment is more likely to be targeted at higher growth opportunities in faster growing emerging markets.
The general belief is that larger corporations especially multi-nationals can largely look after themselves, knowing that their banking wallets are sufficient to ensure priority treatment. Conversely, SME’s are expected to lose out in this process of prioritization with lack of credit facilities particularly pronounced.
Although the European Central Bank would like to see regulatory congruence, this seems unlikely in the near-term.
Finally, there is an expectation that some intra-EU business will continue to be possible for UK-based banks in countries that have more flexible regulatory regimes such as the Netherlands, Ireland and Germany however less so with Spain, Italy and France.
Where are the banks heading?
The main lobby group for UK financial services firms, TheCityUK, warned that it was critical for the financial and professional services industries to have urgent clarity on transitional arrangements. It said that unless the UK can strike a deal for a post-Brexit transition period by the end of March next year that firms will start moving their activities away from London.
However, UK-based banks are not in a position to sit around to see what rabbits the UK Government can pull out of its top hat and are busy making and executing on plans to ensure they can support their chosen customers with as little disruption as possible.
Therefore, they are busy establishing subsidiaries in key EU27 locations. For pretty obvious, if different, reasons Frankfurt and Dublin are the most popular choices to date – although as you’ll have noted– away from the banking sector – one of the US’s largest insurers recently announced it was going to relocate its EU headquarters from London to Paris.
Regulation and Talent
Specifically on regulation, there is a case that the ECB will attempt to enforce a level playing field within the EU27 and exclude UK-based activity wherever possible. As with all restraints of trade, the consequences will result in higher costs for consumers.
However, as you may have read or heard, the Chancellor, Philip Hammond, told a Mansion House audience a while back that “the EU has legitimate concerns” about future UK regulatory oversight and it may well be that some form of joint supervision is possible.
Whilst regulation will need to continue to have cross-Channel congruence if the UK is to achieve some level of equivalence on services, the main focus of the regulators is on prudential supervision, i.e. monitoring and enforcement, especially at a macro level to ensure financial market stability.
On talent, the current apparent shambles that goes by the name of government policy on immigration and work permits will, I fear, undermine the UK’s ability to attract high-value talent to the UK banking industry, as elsewhere in the wider economy.
On a brighter note, as Keynes remarked – “in the long run we are all dead” - but hopefully some time before that a new equilibrium will be established. However, for the structural issues I state, the result will inevitably have been a diminution of the UK’s financial sector with all that entails.
The challenge now for the UK government is to negotiate a deal that minimises that affect, whether that be in negotiating a special access deal for financial services and/or by being more flexible in terms of work permits for City workers. Either way, lots of work to be done in a period on non-ergodicity!