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LONDON: The UK financial sector is nervously watching the prospect of a “no deal” Brexit grow, fueling fears of loss of customers and influence in key areas, as well as market turbulence.
The Bank of England, where most of the risk is concentrated, is preparing for the end of the transition period on December 31, with no sign of a free trade agreement between the European Union and Britain.
The central bank said a “no-deal” result could lead to “some market volatility and disruption of financial services, particularly for EU clients.”
Investment bank Morgan Stanley predicts a 6 to 10 percent drop in the FTSE-250 index and a 10 to 20 percent drop in bank stocks, which have already been hit by the coronavirus.
As of January 1, the UK financial sector and the City of London financial district will lose a European “passport” allowing it to sell financial products and services across the EU.
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“The City” is also concerned about talking about a regime of “equivalence” of compatible rules that, in theory, would keep the financial keys open, but that in practice could easily be revoked.
The EU has already given the green light to derivatives clearinghouses, which underwrite more than a trillion dollars in transactions every day.
But it has not yet said it will do the same with trade, which accounts for hundreds of billions of pounds a day.
Banks and financial institutions have taken technical measures to guarantee smooth transactions in the event that bilateral talks fail and governments on both sides of the Canal legislate, to guarantee continuity in insurance or asset management contracts.
“If the UK and the EU have a more acrimonious relationship, it might take longer to get these equivalency decisions,” UK’s Sarah Hall told a Changing Europe think tank.
COST AND RISKS
Britain left the EU in January and has been on a standstill until the end of this month as the two sides try to agree on the terms of their new relationship.
But a large number of British financial institutions have already set up or expanded teams and offices in Amsterdam, Frankfurt and Paris to keep working.
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According to consultancy Ernst & Young, 7,500 of the more than 500,000 people who work in The City have already relocated.
EY said that finance companies have also transferred more than £ 1.2 trillion (US $ 1.6 trillion) in assets to the EU since the British referendum on EU membership in 2016.
In the event of a “cliffside” divorce with London, the European Commission could complicate life for UK subsidiaries by asking for more shares or transferring additional staff before granting a business license.
Transfers of personal data could also be problematic because the Commission has not yet validated UK data protection rules.
Banks and investment firms could choose to comply, but any move could be further complicated by travel restrictions imposed due to the coronavirus outbreak.
Otherwise, they could forgo certain clients or activities that would become too expensive or risky, said Simon Gleeson of the Clifford Chance law firm.
Economies, including Britain, have been hit by the global pandemic, which has created a difficult trading environment of low or negative interest rates.
“This would play out completely differently if the banking industry were profitable and had surplus capital,” he added.
Some have already closed the accounts of British citizens living in the EU, to an extent that affects tens of thousands of people, but that process could be extended further.
DERIVATIVE WARNING
The derivatives market could be particularly affected.
London is the world capital of the complex but vital financial instrument, which traders buy to insure against sudden changes in exchange rates or interest.
The Bank of England said on Friday that UK banks remain “resilient” to the risks of Brexit and the coronavirus.
But he warned that some EU-based companies might have trouble providing cross-border services and vice versa.
That could result in an exodus of derivatives brokerage activity to other jurisdictions, particularly Wall Street, he added.
All this comes at a time when European financial services legislation is largely based on the British model.
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British regulators insist they want to maintain a “solid” level of financial standards and not participate in regulatory “dumping”, which Europe fears.
On the other hand, said Gleeson of Clifford Chance, “the biggest concern on both sides is whether what is happening is going to have the effect of loosening regulatory oversight.”
If that happens, it will become more fragmented and less able to combat fraud or dangerous market behavior, he added.
