Britain is less than a year away from formally leaving the European Union but the Government has yet to present a coherent vision of Brexit to UK businesses and the general public.
The idea of a goods only customs union is expected to emerge from a Cabinet meeting this weekend, but this will not help the City of London, whose hopes of passporting after Brexit have already been dashed by the Prime Minister. At the same time, Europe’s banking regulator has warned that the financial services sector has not planned properly for a no-deal Brexit and is relying too much on a transitional deal.
Since the vote to leave the EU, the City’s biggest banks have warned that they are planning to relocate staff, offices and even headquarters to cities within the customs union such as Paris, Dublin, Frankfurt. Some have already begun this process, with Bank of America and Barclays among the most recent firms to announce that they are switching London posts to the EU.
But there are signs that, while Brexit negotiations roll on, the wholesale loss of jobs to the EU initially feared has not happened: Barclays, for example, employs nearly 50,000 people in the UK, is moving around 50 posts from London to Frankfurt – 0.1% of its staff – and these jobs will be filled in Germany rather than involving the transfer of London staff. So far the “exodus of bankers” has yet to materialise.
Does the City Deserve Special Treatment?
Apart from jobs, one of the key issues for City firms is passporting, which allows financial products to be marketed and sold to institutional and retail customers across Europe. After the Brexit vote, companies had pinned their hopes on passporting continuing as part of a special access deal for financial services.
Banks’ argument was that the because of its strategic importance to the UK economy, the City could somehow be protected. The Prime Minister dismissed this idea at the beginning of March, saying the UK Government was instead looking for a “broader agreement” with the EU.
In a speech at HSBC headquarters in March, Chancellor Philip Hammond was optimistic that Britain’s finance industry could be a key part of the UK’s free-trade agreements but again passporting will not continue: “EU passporting did not create the City of London … nor did some smart regulatory fix or government incentive.”
Hammond stressed that the EU also relied on the City of London as much as the reverse: “So I am clear not only that it is possible to include Financial Services within a Trade Deal but that it is very much in our mutual interest to do so”. Our economies are interconnected, he stressed, and the “regulatory frameworks are effectively identical”.
He added that from day one of Brexit, there would be “equivalence” between UK and EU financial regulation. At the same time, the UK needs to look forward to a “world beyond the single market and passporting”.
EBA Warns of Complacency
However, the European Banking Authority, which regulates banks across the EU, said at the end of June that complacency over the prospect of a no-deal Brexit is one of the biggest threats to UK firms. Its analysis concluded that the City’s preparation is “inadequate”, especially given that the transition period agreed by politicians “does not provide any legal certainty”. The EBA itself is currently headquartered in London but is relocating to Paris after Brexit.
“Firms cannot take for granted that they continue to operate as at present nor can they rely on as yet unrealised political agreements or public policy interventions,” said EBA chair Andrea Enria.
Financial companies need to ensure they have the right regulatory permissions and management in place, the EBA warned. Derivatives contracts are flagged up as a particular area of concern by the EBA. The regulator also said that customers should be told which products and services will be affected by EU withdrawal by the end of 2018.
As time has gone on, the lack of political unity required to implement the Prime Minister’s vision of a hard Brexit becomes less likely and the chances of a business as usual approach to City regulation becomes more plausible. After all, the second Markets in Financial Instruments Directive (MiFID II) came into being in January this year.
The implementation of MiFID II goes on within firms, and this is supposed to increase transparency and lower costs for consumers of financial products such as funds, ETFs and shares. Morningstar analysis shows that this has already led to a lowering of charges for passive funds, although this has not been consistent across the board.
Some firms are relying on the transition period to provide some breathing space while politicians wrestle with the details of Brexit. But as the European Banking Authority warns, a Brexit deal or transition period cannot be taken for granted.
