LONDON — When officials at the Bank of America announced in mid-July that they will move some operations out of London and to Dublin, the company joined a growing list of major banks planning to move some staff out of the British capital and to other cities in the European Union.
The reason? The country’s looming withdrawal from the European Union, or Brexit, is increasing a sense of uncertainty, a situation the financial services industry fears the most — and for good reason. That’s because Brexit will sever the U.K. from rules that allow financial firms in one EU country to operate in others. Severed from such “passporting” rights, trades from a U.K.-based firm would be deemed illegal. As a result, the sector’s future health in London is in jeopardy, as many thousands of those jobs will soon be heading to other EU cities.
Belgian think tank Bruegel estimates that Brexit could cost the United Kingdom 30,000 jobs, 10,000 of them in the City, London’s financial center, and force the banks’ clients to move $2.1 trillion in assets out of the country.
“It won’t be the end of the world, but it will be a significant blow to the City,” says Jonathan Portes, an economics professor at King’s College, London.
The U.K.’s $229 billion financial services industry provides jobs to 2.2 million people, a third of them in London. So when banks announce relocation plans, 10 Downing Street takes notice. Many banking executives, as well as other leading business groups and leaders, are successfully pushing the Conservative government of Prime Minister Theresa May to seek a transitional agreement with the EU that will extend by several years the current March 2019 deadline for Brexit negotiations to end.
Proponents argue a transitional agreement is necessary because it’s almost certainly impossible that a final divorce settlement can be negotiated in less than two years. There are also fears that British companies with strong trade and employment links to the EU could, without a longer implementation period, lose access to Europe’s 500-million person-strong single market before a new framework for future relations and trade with the bloc is reached.
At the end of July, May’s government, after months of hinting, clearly indicated it now wants a transitional deal — although the conditions it set for its acceptance make it uncertain it will happen.
Downing Street’s openness to delaying Brexit is certainly a reaction to the pleas from business leaders. It’s also a response to the Conservative Party’s dismal showing in June’s snap election, which saw it lose its majority in Parliament, and was widely read as repudiation of May’s hardline approach to Brexit.
Another possible factor: Uncertainty over Brexit has already slammed the brakes on British economic growth. The economy grew by just 0.2 percent and 0.3 percent in the first two quarters of this year, its worst performance since 2013. On Thursday, the Bank of England reduced its growth forecast for this year to 1.7 percent, down from its May forecast of 1.9 percent.
Brexit is a problem for the financial services industry because of the legal arrangement called passporting, which is baked into the single market’s rules. If a bank opens a subsidiary in Britain, which means it’s in compliance with U.K. regulations, passporting allows that hub to service clients and open branches in states across the EU, regardless of differing regulatory regimes.
Once out of the single market, Britain loses its passporting rights. That’s why banks that have EU operations headquartered there need to move those services to other cities within the union. Britain’s Financial Conduct Authority says that 5,500 U.K. financial services companies — including banks, insurers and asset managers — with combined revenues of $11.7 billion, now use passporting rights.
Robert Grübner, a partner at consultants Bain & Company’s Frankfurt office, says “these announcements signify that the banks are already very deeply into preparing for a hard Brexit,” or one that entails the U.K. leaving the single market.
It takes 18 to 24 months to plan for these kinds of moves, Grübner adds, so “there needs to be clarity very quickly” over any transitional agreement.
But while May’s government is now embracing the notion of delaying Brexit’s deadline by two or three years, it’s also still insisting that free movement of people will still end on schedule in March 2019.
That’s a problem because the unhindered movement of labor is a key principle of the EU. Once Britain places controls on immigration from Europe, it can no longer remain a member. A transitional agreement that doesn’t also include single-market membership would be of little help to British industries reliant on EU business, particularly financial services.
Meanwhile, the EU has yet to say whether it will also commit to a transitional arrangement. Nevertheless, L. Alan Winters, an economics professor at the University of Sussex, says Brussels ultimately will agree, “… because it would not want to be seen as being too hostile.” And there’s little benefit to the EU to force the U.K. to chaotically crash out of the union.
Of course, even if Brexit is postponed for a few years, the loss of financial services jobs to Europe would only be delayed, not halted. But the longer the U.K. can retain those jobs and assets, the longer it can benefit from them. Additionally, once banks start moving operations to other cities like Frankfurt and Dublin, they may find that even further consolidation makes sense and move even more work out of London.
That’s why Portes says the EU will hold off agreeing to a transitional agreement until late next year. In the meantime, he says, “all the uncertainty will mean more banks and businesses will make relocation decisions to EU cities.”
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Financial Sector Pushing U.K. to Extend Brexit Negotiations originally appeared on usnews.com
