As Theresa May steps up attempts to make MPs to endorse her Brexit deal, Britain’s financial services industry appears, to be one of the best-prepared sectors for quitting the EU.
This is a credit to the City of London’s international banks, asset managers and insurers and to regulators. Yet, however, carefully it has equipped itself and whether Brexit happens via a signed compromise, 2019 will mark a major knock to the City’s pre-eminence.
When banks started in 2016 to apply to the jurisdictions in Frankfurt, Dublin and Paris for authorisation to set up post-Brexit subsidiaries, some ridiculed the precautions as over-vigilant. Although Brexit would terminate the habit of using London as a hub from which to operate business with clients in the other 27 EU countries, a compromise would reflect something analogous to this “passporting” agreement.
With fewer than three months to Brexit day on March 29 and a deal still illusory, the financial sector’s preparations look shrewd, not paranoid. In
the short term, some disruption looks likely despite the preliminary work. Fears that EU companies’ derivatives contracts would be unqualified for clearing in London were addressed late last year when the European Commission permitted a year’s deferment.
Other hiccups remain, including concerns over matters as core as EU governments’ capability to issue bonds through London. Once Paris and Frankfurt have developed up the capability and proficiency to manage such business themselves. EU policymakers are expected to require it to go.
In extremis, up to a fifth of the City’s turnover is at risk. London’s stature as a centre of effective governance, built on English law, will afford some insurance. As long as investors, and the market liquidity they provide, remain in London, so will the ecosystem that causes the City to be Europe’s biggest financial hub.
To offset lost business and ensure London can compete globally, activists are advocating that the UK to cut taxes. The City is also pinning hopes on growth sectors such as financial technology.
Yet, even in spite of the best-laid plans, Brexit will inevitably contribute to business being given up to European centres and diverse global hubs, predominantly New York. The question is how much?