Brexit plays a role as London’s Financial Power Plant

LONDON – For Britain, its exit from the European Union is said to be the beginning of a new era as “Global Britain”, an open, inviting and far-reaching country. For the European Union, Brexit is an opportunity to repatriate some businesses across the English Channel and further strengthen the continent’s economic position in the world.

For the City of London, a major hub for international banks, asset managers, insurance companies and hedge funds, Brexit is causing a political headache. Britain’s financial center has been at the center of these two agendas, so the future of the relationship between the city and the rest of Europe has deteriorated and is uncertain.

Britain left the free trade bloc in late January, but immediately entered an 11-month transition period that kept everything unchanged. What happens after December 31, when this transition period expires, is being negotiated to the wire. The balance is struck by things like fishing quotas, the long lines needed for customs controls in ports, and the disruption of car manufacturers and other manufacturers that have fine-tuned the “just in time” supply chain.

But London-based global financial firms already know they are losing the biggest advantage of British EU membership: the ability to simply offer services to customers in the region from a single region, known as a passport. This allowed a London bank to lend to a Venetian company or trade bonds for a Madrid company.

After January 1, it won’t be that easy. The ability of UK firms to offer financial services in the European Union depends on EU decision-makers determining whether Britain’s new regulations are close enough to their own to be able to trust them – a critical concept known as equivalence.

The problem is that some very general banking activities, such as taking deposits and lending to companies and individuals, do not meet the requirements of equivalence. This will result in a patchwork layout with large holes. That is why it has recently been said that thousands of people in Europe, mainly Britons, have a British bank account and are closing their accounts.

To facilitate the transition, Britain has decided to copy some of the European Union’s provisions. On the other hand, he hoped the European Union would allow British companies to continue their business in the bloc. In early November, the UK finance minister said its government would adopt EU rules in a number of areas, including capital requirements and credit rating agencies.

But the European Union did not reciprocate. The crushed feelings caused by the divorce between Britain and the bloc continue to affect the relationship between the two. Brussels officials say they are wary of Britain taking advantage of its independence over time and weakening risk limits and other rules that are inappropriate for banks.

The lack of an agreement “cannot be the starting weapon of deregulation competition,” said Joachim Wuermeling, who is in charge of banking supervision at the German central bank, the Bundesbank, last month.

This has led to a political stalemate in which London and Brussels continue to contradict several key elements of financial regulation and are unwilling to grant each other market access.

One such rule allows investment firms to offer their services and financial securities cross-border to clients in the European Union under the Mifid II regime. The bloc will update its rules on cross-border securities trading and will not give Britain a seal of approval until the review is completed in the middle of next year.

This position provoked an outraged response, with only Andrew Bailey, the governor of the Bank of England, complaining to MPs in September about the behavior in Brussels.

“I just don’t understand how there could be an equivalence process where the EU is essentially saying, ‘We’re not going to judge equivalence right now, because our rules are changing,'” Mr Bailey said. “What does that really mean? That means they think it is a rule-making process. ”(The accusation of“ rule-making ”is often the final rejection in these negotiations, i.e., one party dictates rules to the other.)

He emphasizes the disharmony that, unlike the pre-Brexit rules, these regulatory decisions are made unilaterally and can be revoked within a short period of time.

The lack of agreements means that London will lose financial jobs as a result of Brexit. Even before the year-end deadline, EU regulations are forcing banks to relocate workers and capital to the continent. The movement of decision-makers is important: In a crisis, European banking supervisors do not want critical people to be offshore somewhere, even if it is London.

Overall, since mid-2016, financial firms have moved $ 1.6 trillion in assets out of Britain, according to EY.

But the process is not over yet. It was delayed by the pandemic, which made it difficult for people to move and some corporate clients were more busy maintaining their business than signing new contracts.

“Some banks and their customers obviously want to wait until the last minute for actual transfers,” Wuermeling told the Bundesbank. – We suggest they act now.

JPMorgan has asked about 200 employees to move from London to other European cities before the end of the year, mainly Paris and Frankfurt. An additional 100 workers are expected to move in next year. JPMorgan also plans to spend around € 200 billion in assets in Frankfurt. Goldman Sachs plans to transfer between $ 40 billion and $ 60 billion from its UK operations to its German subsidiary by the end of the year. This unit had only $ 3.6 billion at the end of 2019, according to the company’s submissions.

All in all, German-licensed creditors are relocating about € 400 billion, or $ 475 billion, in assets to the continent because of Brexit, according to the Bundesbank. This will more than double the assets of banks in the European Union.

The Bundesbank expects banks that have applied for German permits for Brexit to bring in 2,500 employees, some of whom are based in other cities such as Milan or Amsterdam. It is hardly this mass migration to the continent a few years ago. (It is estimated that it has reached 75,000 jobs moving from London to Europe.)

Nevertheless, the steps keep alive the question raised since the 2016 Brexit vote: Can another European capital include London as the region’s dominant financial center?

So far, there have been no big winners. The money was scattered to Frankfurt, Luxembourg, Dublin and Paris.

“London remains by far the most influential player,” said Michael Grote, a professor at the Frankfurt School of Finance and Management who studied the impact of Brexit on financial services.

Regulators are confident that financial stability will not be jeopardized in January because firms take a prudent approach to prepare for the worst. But they say there may still be some market volatility by the end of the transition period.

Next year, Britain’s financial sector is expected to remain one of the largest in the world: The amount of money it manages is about ten times the size of the UK economy. There is a relatively small company that actually has customers in the European Union and is threatened by regulatory conflicts.

“It’s not so much the London business and the UK financial center that depend on equivalence,” Alex Brazier, head of the Bank of England’s financial stability strategy and risk, told MPs in September. About 10 percent of the city’s £ 300 billion in financial and insurance revenue comes from customers in the European Union, he said. About a third of that, £ 10bn, comes from activities that can continue under equivalence rules, he added.

Although London will not lose its status as a European financial capital, its priority will wear off. The financial services market is becoming more fragmented.

Andrew Gray, head of PwC Brexit, said the scattering of financial services around the continent will result in greater friction in the system, increasing costs. “It has economies of scale in London,” he said. – You lose this economies of scale.

Eshe Nelson reported from London and Jack Ewing from Frankfurt. Michael J. de la Merced from London reported.