Bank of England’s Brexit Plan
Following the latest Brexit developments sometimes feels like watching a tennis match.
Michel Barnier, chief EU negotiator, served what seemed like an ace: a powerful shot that the UK appeared unlikely to be able to return. This came in the form of him saying that the UK can’t expect a bespoke trade deal that permits the City’s financial services to continue to use the current passporting instruments. Losing these passporting rights would mean that UK financial institutions could no longer do business in Europe and this would mean job losses for an estimated 10,000 City workers.
These high-paying banking sector jobs contributed £35.4bn to the exchequer in 2016 and 2017 and the services are a vital sector of the UK’s exports. The House of Commons reported that in 2016, financial and insurance services contributed £124.2 billion in gross value added to the economy.
The Bank of England has been quietly preparing for this threatening serve and is meeting it today with a rather cunning plan, or volley, if you will. It is yet another item to be filed under: Everything you always wanted to know about Brexit but were afraid to ask. Would people have voted Leave had the famous red bus with the message “We send the EU £350 million a week. Let’s fund the NHS instead”, instead extolled the virtues of remaining flexible during the negotiation process? So much for taking back control.
Bank of England to the rescue
In effort to maintain London’s coveted position as a global banking centre with the lions’ share of the world’s banks, the Bank of England (BoE) has crafted a solution that will allow banks to operate as they normally do, regardless of the deal that is struck with the EU. The plan’s central feature is, that European banks that currently operate as branches will not have to become subsidiaries, which is an expensive process that would compel them to decamp to Europe, taking the jobs and tax revenue with them.
Over a hundred banks in London are currently branches of lenders with EU headquarters that would have to spend massive amounts to stay as subsidiaries after March 2019, when the UK leaves the EU. Deutsche Bank, which employs 9,000 people in the UK, would lose billions of pounds if it had to become a subsidiary.
Keeping European banks in the UK isn’t simply an altruistic olive branch handed to the EU after it has played hardball about financial services. Financial regulators anticipate that the close cooperation that is currently in place between the UK and EU27 wholesale banks will be maintained even if the right to passporting dissolves. So, the BoE is building a bridge that saves the City jobs and tax revenue, keeps London as the financial gateway and keeps the connections alive between the UK and continental banks.
What’s the downside?
Critics have argued that the UK should have held back this bargaining chip until a later stage in the negotiation, however, in their defence, it must be noted that banks aren’t willing to be kept waiting. Morgan Stanley, Citigroup Inc, Standard Chartered Plc and Normura Holdings Inc have already moved their European headquarters to Frankfurt.
There’s increased risk to UK customers of these EU bank branches that would be mitigated if they became subsidiaries, as those must hold funds as insurance against a financial crisis. Now, as a branch customer, you could lose every penny in the event of a crisis. That’s a major drawback that could come back to haunt businesses and families who hold accounts in these banks. The branches will be free to flee back to their European headquarters with depositor’s funds.
Also, the plan doesn’t give the UK any similar flexibility in Europe, pointed out ACLS Global strategist Marshall Gittler, saying, "Of course the more important question is whether UK banks will be able to operate on the continent under existing rules, and the answer is no." The reason for this is the that the UK wants to limit the free movement of people, according to Hubertus Väth, managing director of Frankfurt Main Finance. Väth, whose trade organisation represents German financial institutions, told the Today Programme that if the UK wants a deal that includes continued access to the EU’s financial services market, it must concede on the issue of free movement.
Barnier plays Scrooge
This signal of goodwill might be a calming response to Barnier’s statement that the UK loses financial passporting rights in leaving the single market. As Miles Celic, chief executive officer of TheCityUK, a lobby group for British financial services remarked: “It might be Christmas, but Michel Barnier doesn’t need to play Scrooge.”
Celic confidently expects that financial services will feature in the future trade agreement with EU and it would be a heavy blow to the industry if it wasn’t. He also said, "Services make up around 80% of the UK’s economy – and around 70% of the EU’s, with financial services making up a significant component of that. It is vital for the future competitiveness of the UK, and Europe as a whole, that UK and EU negotiators work to secure an ambitious and comprehensive deal."
UK wins Forbes Best Countries for Business Award
With myriad uncertainties surrounding businesses regarding Brexit, perhaps it’s a surprise that the UK has just earned the top spot in Forbes’ survey of the world’s best business locations. Britain rose from 5th place last year as compared to 153 other nations based on 15 factors including taxes, technology, property rights and investor protection.
Forbes noted that a steady volume of US commercial investment has come about after the referendum vote. Wells Fargo spent $400 million to purchase it’s London headquarters. Apple and Facebook’s plans to open large London offices also point to international businesses being convinced that the British economy—the world’s fifth largest—will remain resilient in the long-term.
Jeff Lessard, a consultant who assists companies with location strategies for commercial estate broker firm Cushman & Wakefield, said, “The best thing going for the UK is that London is one of three global hubs for financial services.”
Passporting isn’t the only issue businesses in Britain face after Brexit. Retaining highly educated global talent is a real concern for firms in all sectors of London and the rest of the UK, as well. If the prize of being the best country in which to do business is to be kept after Brexit, freedom of movement that allows talented workers to come to the UK will be a critically important consideration.
Somewhat ironically, freedom of movement now also appears to be the key to unlocking permission for British financial companies to retain their passporting rights across Europe. The reality of having to be flexible—to give a little in hopes of receiving something in return—in these negotiations was never mentioned on the side of that Brexit bus, was it?