LONDON, June 29 (IFR) - Investment banks are scrambling to establish how post-Brexit changes in the UK’s “passporting” rights for financial services will impact their businesses, putting thousands of jobs in London in the balance.
Passporting is considered the most significant feature of the EU single market for banks and other financial companies, allowing firms in one EU country to provide services to clients elsewhere in the single market.
But following Britain’s vote six days ago to leave the EU, those arrangements could be scrapped, watered down or become the subject of negotiations for up to a decade.
There is little sign of a quick fix, and bankers are bracing for the impact.
Richard Gnodde, co-CEO of Goldman Sachs in Europe, said on Tuesday if Britain’s financial passporting was fully removed banks would have to change their footprints and where their people are located. The bank has said it needs to see the terms of Brexit before it can make firm decisions, however.
There have been similar warnings from bosses at JP Morgan, HSBC and others, posing the risk that banks from the US, Switzerland and Asia will shift staff out of London, currently used as a beachhead for their EU businesses. Frankfurt and Paris are the most obvious potential beneficiaries, bankers said, though Dublin, Amsterdam and other cities are keen to roll out a red-carpet welcome too.
“It is very likely that some coverage roles will have to move to the EU, as will a number of middle and back-office roles relating to euro clearing and settlement. Whether trading has to move is a more open question,” said Simon Gleeson, regulatory partner at Clifford Chance.
Operations most likely to be affected are those related to Mifid II, the EU market rules covering a range of products from derivatives trading to bond pricing, bankers said. But most areas of capital markets activity will be affected.
More than three-quarters of capital markets’ business across the EU is conducted in Britain. About 417,000 people are employed by banks in Britain, and there are another 1.8m roles in other financial and professional services.
Senior banking sources say firms need to move relatively swiftly, even if decisions to actually move staff can be delayed for some time.
“We have rooms full of people looking at how we would cope if there wasn’t EU passporting,” a senior banker in London said.
“No-one knows, so you’ve got to plan for the worst,” said a person at another bank.
Banking trade bodies said they are holding “non-stop meetings” to discuss the issue. Banks had lined up contingency plans, but some were half-hearted and few banks expected to use them, sources said.
Applying for a new banking licence in European cities can be a long and arduous process. And bankers do not expect to be allowed to set up “letter box” or “brass plate” entities in a European jurisdiction while continuing to carry out most of the work in London.
Rather, European Central Bank supervisors will demand full details on business plans, capital and liquidity projections, and legal structures - and will want the names of those expected to run the operations. Those plans will determine the type of licence granted in a process that could take 6-12 months.
Politicians and lobbyists will be keen to convince those running banks to relocate to a particular city but those considerations are unlikely to sway Daniele Nouy, the head of the ECB’s banking supervisory arm.
That could also mean there is a first-mover advantage for banks to act. About a dozen major banks could apply for new licences, and they will not want to be at the back of the queue in the ECB’s approval process.
Swiss banks, which face the prospect of having their two main European hubs outside the EU (in Switzerland and the UK), and some US banks almost wholly reliant on London, will be under most pressure, sources said.
Britain will negotiate financial passporting alongside its discussions with the EU on the terms of its exit from the EU. It will have two years to do so once it enacts Article 50 of the EU Treaty. Article 50 has not yet been signed and it may be months before that happens, assuming it ever does. Outgoing UK leader David Cameron said talks on exit terms could start before the formal notice to quit, but EU officials said that is not possible.
Britain effectively has three options once it formally leaves the EU: negotiate bilateral trade agreements; join the European Economic Area; or trade under WTO rules.
The best option for banks is likely to be an arrangement under Mifid II rules effective 2018, which allow “third-country entity passports”, bankers and lawyers said.
These so-called “equivalence” rules allow banks in non-EU countries to have access to the EU if they have a similar regulatory regime to the EU and allow a reciprocal arrangement. It could significantly mitigate the impact of Brexit on banks’ activities, lawyers said.
The third-country passport regime is untested, however.
Even so, achieving a deal based around those rules will prove politically tricky. The EU is likely to be unwilling to extend such benefits to the UK if negotiations over the divorce are acrimonious, or if their are red lines on either side that do not allow for compromise.
“The Union would be expected to insist that as a condition for future access to the EU single market on favourable terms, UK laws should be kept up to date in conformity with EU law under the European Court of Justice. This might not be politically acceptable in the UK after the vote to leave,” Paul Richards, head of regulatory policy for the International Capital Markets Association, said on a call with members on Tuesday.
The primacy of UK law and an ability to restrict immigration were key issues in Britain’s successful “Leave” campaign.
The third-country passport process also does not cover all services and activities, with foreign exchange, deposit taking and private wealth management all falling outside its scope.
The worry about passporting rights is already weighing on banks, whose share prices have been hammered due to fears that Brexit will drag the UK into recession and create further structural and revenue headwinds.
JP Morgan analyst Kian Abouhossein said investment banks faced “structural uncertainty such as the risk of losing EU passporting, which would lead to net additional staff and costs for IBs”.
For an industry where revenues are already under pressure, that is a further incentive to clarify plans.
“Banks will be under pressure from their clients to demonstrate that they are restructuring themselves in order to continue to be able to provide services,” Clifford Chance’s Gleeson said.
“That probably doesn’t allow them to maintain a wait-and-see posture for any extended period. Thus we expect banks to execute restructuring fairly soon based on ‘worst case’ analysis of the possible outcomes of the exit negotiations,” he said. (Additional reporting by Alex Chambers)