BREXIT: THE LEAP INTO THE UNKNOWN.
Three months on, are we any the wiser? “Brexit means Brexit” means what, actually, for financial services? Louise Rowland reports.
The sky didn’t fall in, the markets dipped rather than collapsed and some parts of the UK economy even reported a bumper summer. However, for financial services, largely blind-sided by the vote, these are very early days. Highly averse to uncertainty of any form, the industry is entering totally uncharted territory.
Article 50: the ticking time bomb
The UK is in something of a phoney war. Substantive Brexit talks only start in earnest once the government triggers Article 50, kicking off the formal two-year negotiation process. Both the Cabinet and the City are divided on when the pin should be pulled. Whether it happens at the start of 2017 or later next year, after the French and German elections, the unravelling of multiple complex trade deals could take anything up to ten years.
Hard or Soft Brexit? Norwegian, Swiss or Canadian model or something bespoke? Different options appeal to different audiences. Businesses, however, need a clear roadmap, and London’s pre-eminence as a fintech hub is already threatened, says Leda Glyptis, Director at Sapient Global Markets.
“There’s a loss of momentum: the creation of new consortia is slowing down and partnerships and POCs (proof of concept) about to be signed are now being put on ice. New fintech companies are being incorporated on a daily basis but they may not be coming here anymore. Which means we are losing out on creativity and entrepreneurship in ways we can’t even fathom, let alone measure.”
The whole industry will suffer, she adds. “Banks may be forced to limit the mindshare dedicated to engagement with vibrant new companies and ideas. The timing is hugely unfortunate as the recent situation was maturing and moving towards an ideal of openness, collaboration and co-creation. It was smooth and creative and beneficial for the majority.”
Keeping the pressure up
The government has been making reassuring noises about protecting the City. Chancellor Philip Hammond is holding a series of consultations with business leaders and has pledged continued free movement for top bankers post-Brexit. Bank of England Governor Mark Carney has also been holding talks with leading players.
Several industry groups are lobbying hard, including the Financial Services EU task force, led by Baroness Shriti Vadera, TheCityUK and the BBA. Number one priority is retaining EU passporting rights so that firms can still access the Single Market from a London base. Yet this is proving to be a very tough call. The Government’s stance on reducing EU immigration is diametrically opposed to the European negotiators’ red line on this issue.
London will probably end up keeping some passporting rights, many believe, and there’ll be the possibility of retaining market access by having equivalent regulatory status, once new financial services regulation MiFID II goes live in January 2018. Not necessarily, others argue. Brussels has the final say on equivalence and it could be withdrawn at very short notice.
We should avoid a bonfire of EU regulations, one banker insists, pointing out that domestic regulations could turn out to be even more stringent, if the UK’s recently launched Senior Manager Regime is anything to go by.
The ideal scenario is one reached by grown-up consensus, insists Andy Nybo, Global Head of Research and Consulting at TABB. “There shouldn’t be two distinct regulatory mandates and marketplaces in the UK and the EU. The financial markets should be as integrated as possible, with clearing mandates running smoothly and trading costs minimised. The last thing we need is more friction and costs facing firms. It’s in everyone’s interest to come to an amicable solution. UK and EU regulators should sit down together in a room so that everyone’s needs are met.”
Ready for anything
Nothing much might change for the next couple of years, possibly longer. Yet firms can’t just sit and wait to see what happens, says Martin Davis, CEO of investment management firm Kames Capital.
“Most people are now looking at the fundamentals of their business. At Kames, we had a detailed planning process for 2017 before the Referendum and we’re now going back to basics, thinking ‘what do we and our clients want? Are their needs going to be fundamentally different according to the different scenarios that pan out?’ We need to hedge, making sure that the plans we hatch regarding exporting into other markets have flexibility in terms of, say, passporting rights. Those are the sorts of decision we’re being forced to make in the absence of any other facts.”
Many City firms are preparing for worst case scenarios. Some of the largest asset management firms are already putting in place alternative structures, including being domiciled in two places so that they have a vehicle to trade in the EU.
London in Limbo?
What does that mean for the capital’s status as a global financial centre? About 35% of EU wholesale financial services takes place in London. Will Paris, Amsterdam, Zurich, Luxembourg, Frankfurt, Milan and Dublin mop up large chunks of that business as the City flounders?
Berlin has already launched a high profile campaign to lure away fintech start-ups and there’s talk of Lloyds of London, Goldman Sachs, Bank of America, Citigroup and JP Morgan Chase all upping sticks or at least relocating some of their business. BATS Europe, the region’s biggest stock exchange, has issued similar warnings. It’s also widely assumed that Euro Clearing will leave London.
The general consensus seems to be, however, that, while there will inevitably be some migration and possibly the emergence of a European rival, such as Frankfurt, London will remain the centre of gravity. Other destinations have their drawbacks – high corporation tax in Paris, for example, or insufficient regulatory expertise elsewhere. Plus London boasts all the soft factors: a global language, the perfect time zone for the US, Asia and Europe and a world-leading support infrastructure.
Fran Reed, Regulatory Strategist at data consultancy FactSet, is optimistic about the capital’s prospects. “London is the global financial capital, bridging East and West. I think it will retain that status and that the post-Brexit change will be more figurative than literal. There are two million people in financial services worldwide and a third of them are in London. It’s a business-friendly environment which has always provided stability, productivity and certainty.”
“A thriving banking sector is good for regulators and all constituencies. One of the good things about the UK is that it engages in dialogue – that’s a real strength. The change is difficult but there is so much at stake here.”
Reasons to be cheerful
Optimists – and rock-hard Brexiters – talk of London soaring as a global powerhouse, unconstrained by Brussels and its baggage of multiple agendas, borders and regulatory mandates which have held the City back, Gulliver-style. Expect London to emerge as the Singapore of Europe, they say, free to trade with the fast growing markets in Asia and Africa. This is Big Bang II, 30 years on from the original version.
Many in the City are considerably less sanguine. The high level of volatility and the lack of clarity as to what lies ahead, possibly for several years to come, is seriously testing business confidence.
And yet, silver linings still exist. Some see Brexit as an opportunity for the whole sector to tell a positive story about its central role within the UK economy and why the best global talent should come and work within London’s financial services and banking sector. It’s also an opportunity for banks to get their house in order, says Nadine Jatto, Government Affairs and Regulatory Development specialist at Catalyst. “There’s been a lot of rhetoric about Brussels ‘doing things to us’, interfering with our regulations and the City and so on.” From now on, the buck rests here. “We’ll have domestic regulations and there’ll be no more excuses. The banks need to make sure they’re in proper shape to deal with those regulations. Everyone should be saying ‘Let’s get on with it.’ Let’s have a compliance division liaising effectively with regulators and managing the process properly. Let’s get the banks turning a profit.’’