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Interviews with more than half a dozen senior bankers and business leaders reveal growing certainty that the threat of losing single market access will force a wave of relocations this year and may cause an “unwinding” of a cluster of related businesses.
While the immediate loss of a few thousand jobs is viewed with relative equanimity, concern is mounting over the knock-on effect on financial stability if the City’s valuable related professions begin to fragment.
Douglas Flint, the chairman of HSBC, Britain’s biggest bank, said common regulation needed to be agreed with the remaining 27 EU members once Brexit talks got under way or there was a risk of sparking turbulence in the financial system.
“One of the critical pieces is the ecosystem that exists, which effectively connects the fund managers to the risk managers to the liquidity providers to the insurance providers and the credit providers … it all benefits from all the other pieces being there,” Flint said.
“That gets built up over decades as bits get added to the existing cluster. It’s difficult to know which is the piece that causes people to say, ‘Well, if that’s not there I have to do something else,’ and you get an unwinding of a cluster because things that are connected today are more important than people imagine.”
He echoed that warning in remarks accompanying HSBC’s worse-than-expected results yesterday, pointing to “uncertainties facing the UK and the EU as they enter Brexit negotiations”.
HSBC will implement its contingency plan – to move 1,000 roles from London to Paris – “progressively over the next two years” but American, Swiss and Japanese investment banks may not have as much time because of the way they are structured. Many rely on their operations in London to service their EU clients and are preparing to open replacement offices and apply to local regulators for new banking licences to ensure they can keep providing finance to major clients after the UK leaves the single market.
All firms need to make some adaptations to the way they operate, regardless of the length of any transition period, but City sources said the extent to which business leaves the UK will depend on what deal Theresa May’s government strikes.
Flint said there was recognition of a need for a transition period. “If one of the ways of avoiding damage is ensuring a proper implementation phase that must be in everyone’s interest” .
“The point of no return is probably nine to 12 months away,” said one senior investment banker in London. “The only thing we might know by then is whether an implementation phase is possible, but I am very sceptical they can deliver on it [in time], so we will go past the point of no return.”
A report by accountants PricewaterhouseCoopers for a pan-European lobby group has warned that some banks cannot wait for long. It says: “Clarity will only emerge on the negotiation outcomes during the negotiation period following article 50 notification, with certainty only at its conclusion, so these banks need to begin implementation before having certainty over the eventual Brexit outcome.”
Such warnings are being passed to the government by a number of top financiers, many of whom believe the City’s early focus on job losses has obscured the more important challenge of persuading Europe that it faces potentially catastrophic risks of its own if London’s position as a financial centre is damaged.
“The big question of what being outside the single market [for financial regulation] actually means is still unresolved,” said Sir Howard Davies, the chairman of Royal Bank of Scotland and a former deputy governor of the Bank of England. “How far, even if you’re outside the single market, can you retain equivalence … or are you regarded as a third country; all of that … tedious sort of detail … is still to play for.
“The extent to which we get equivalence will depend on the extent to which we can bring home the argument that not agreeing a reasonable degree of equivalence between London and the rest of the EU is actually going to be disruptive to Europe’s capital markets and damage the ability of European companies to raise funds. That’s where the current battleground is.” [...]