18 July 2016

Financial Times: City of London sees Brexit differently to new minister

[...] Banks, asset managers and insurers — and their UK employees — all potentially have a lot to lose. For these institutions, the immediate concern is to reassure European staff who work in the UK under the “free movement of people” rules. An estimated 20-30 per cent of staff at the big banks and asset managers come from non-UK EU countries.

At the same time, they are impatient to communicate what is at stake. Any employer involved in European securities trading will be keen to keep a euro clearing hub in London (probably a lost cause, given the European Central Bank’s likely insistence it moves inside the eurozone).

Easy access into the EU single market is another big priority. Banks’ trading operations may be able to tap into incoming “Mifid 2” rules allowing non-EU countries to access the single market if their regulatory set-up is deemed to be of an “equivalent” standard.

However, there are three big problems with this. First, the precedent of the Alternative Investment Fund Managers Directive is not encouraging. AIFMD also contains an “equivalence” provision, but, five years on, and no jurisdiction has yet been granted leave to use it. Vengeful forces within the EU will be even keener to ensure that the Mifid 2 equivalence provisions are not available to the UK.

Second, even if the UK were granted equivalent status, bankers worry that access could be rescinded with four weeks’ notice. That makes the arrangement too insecure to be of use, unless it is underpinned with a specific treaty (unlikely if there is no UK compromise on immigration).

Third, the UK’s new Brexit minister seems convinced that deregulation — as opposed to the maintenance of equivalent regulation — will help everyone. In his Conservative Home article, Mr Davis talks about “needless and restrictive” regulation and explains: “Regulation already in place will stay for the moment, but the flood of new regulation from Europe will be halted.” That way forward might sound liberating but it could scupper any remaining hope of exploiting those Mifid 2 equivalence rules.

There may, of course, be a way of breaking this deadlock, especially if EU countries come to realise that they, too, benefit from the strength of London’s financial centre.

In the meantime, though, some in the City are thinking creatively. One top banker with substantial political experience believes a UK-EU treaty benefiting financial services as a whole will be so fiendish to hammer out that a more creative approach is called for. It should be possible, he believes, for individual companies to negotiate a deal whereby they continue to be regarded as EU entities for the purposes of regulation and market access.

If that seems fanciful, one potential starting point could be to incorporate as a so-called Societas Europeae (SE), the little-known EU company standard. Up to now, hardly any British companies — with the exception of a few insurers, led by Aviva — have used the SE model.

But, as long as the UK is still in the EU, changing from a PLC into an SE is perfectly feasible. Being an SE in turn grants a kind of “free movement of company” status, making it easier to move operations across EU borders. [...]

Full article on Financial Times (subscription required)

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