10 July 2017

An autumn bank stampede to relocate?

So far, banks have announced most frequently a move to Frankfurt whilst insurers are more widely spread – triggering complaints from some countries about a “race to the bottom” in regulatory standards.

Even at this early stage, the EU regulatory community is responding to such charges and laying out some of the obvious ground rules. The comments are no more than one would expect (and hope) from prudent regulators – but do make some of the more extravagant claims from Leave campaigners look distinctly naïve already. After all, the EU is still struggling with the aftermath of the Great Financial Crash with continuing bank resolutions and liquidations.  It would not make any sense to allow a sizeable part of the EU financial system to be run by “brass plate” companies from a third country that had explicitly rejected abiding by EU standards and enforcement.

The European Supervisory Authorities (ESAs) have led the way:

• European Banking Authority (EBA): At the most basic level, the European Council has already decided the mechanics of the decision to move the EBA itself out of the UK, but the practical rules for banks will come from the supervisor - the Single Supervisory Mechanism (SSM).
• European Insurance and Occupational Pensions Authority (EIOPA) is “closely monitoring the developments and will publish in due course its guidance for national authorities on sound principles for authorisation and supervision,"
• European Securities market Authority (ESMA) has already announced a clear and tough line on “the outsourcing or delegation of certain activities or functions to UK-based entities, including affiliates”.  The opinion sets out nine principles:  No automatic recognition of existing authorisations; avoiding letterbox entities etc. It promises further detailed guidance for asset managers, investment firms and secondary markets.

From the UK side, the Bank of England stepped up the pressure on firms by demanding - very properly – that they explain to the Bank their plans for the UK’s departure from the EU covering all possible outcomes, including a hard Brexit.  The deadline was 14 July so the autumn is likely to be the moment when UK firms are forced to face up to reality.  To help dispel any “fog in the Channel”, the SSM has now run two Brexit workshops for systemic banks – one for UK banks wanting to relocate to the EU27 and another for EU banks wanting to maintain business activities in the UK.

The relocation workshop was addressed by SSM Vice-Chair Lautenschlager and set out some hard truths: no shell companies; short timeline and no grandfathering of internal models. Moreover, she pointed out that the CRDV/CRR2 “banking package” was still under discussion by the legislators.  This package includes a proposal that non-EU G-SIIs with more than €30 billion of assets in the EU will be required to operate those assets via an EU-authorised “intermediate parent undertaking.”

The second workshop on EZ banks operating in the UK was opened by SSM Chair Nouy and her comments3 were even more forthright about the timeline.  Clarity will only come late in the negotiations and “you should not count on transition periods that have not yet been agreed.”  It will be for the Prudential Regulatory Authority (PRA) to grant the licences and “the queue might be long”. The wake-up call could hardly be louder “we asked the banks we directly supervise to share their Brexit strategies with us.  Having analysed these strategies, I think it is fair to say that most banks are not where they should be.”

By the autumn, the Bank of England will have analysed the responses by UK banks to its questionnaire.  Will it have to be equally blunt about “most” banks?  Given all this pressure, firms will soon be forced to be brutally realistic about how long it will take to have a fully functioning bank up and running in the EU (and vice versa) after Britain has left the EU on 29th March 2019 – only 19 months away.

One clear message is that “the clock is ticking” on the perhaps one year timetable for the permissions, let alone being fully functioning with properly qualified staff etc. That means complex and expensive decisions must probably be made before Christmas 2017 – so almost certainly before even any serious negotiations on some putative “transition deal” that may well take several years to turn into EU law even before it takes effect in the Member States. 

As the penny drops in the next few months, relocation decisions may suddenly take on an urgent life of their own and become unstoppable.

An edited version of this article published on Financial World is available for downloading below.

© Graham Bishop