London financial bosses entered 2017 with renewed warnings about the potential impact of Brexit, with HSBC chairman Douglas Flint warning that if the UK was to lose its passporting rights as part of its exit from the European Union, Ireland could be in the frame for relocated activities.
Speaking in testimony on Tuesday before the treasury select committee in the capital, Mr Flint said the UK-headquartered bank could take “ pre-emptive action” and move activities before article 50 negotiations were to be completed.
“Our regulators and customers expect us to plan for the worst,” the chairman said. “We need to assume what might happen if we end up with a break after the article 50 process with no vision of where we are going and no transitional arrangement.” Article 50 refers to the trigger for Britain to formally begin the two-year process of leaving the EU.
Prior to the referendum the bank said it would move 1,000 investment bank staff to its office in Paris if the UK voted to leave, as the group already has a full services bank in France. Mr Flint added on Tuesday that it could move any activities that it would passporting rights on “ to France, or indeed to Ireland or Holland or any other place within Europe that we have operations”.
Mr Flint reiterated his call for a two- to three-year “standstill” or transition period that maintains the status quo, regardless of the outcome of negotiations, to allow banks time to restructure their operations and move, hire and train staff.
Financial stability
Also speaking at the committee meeting London Stock Exchange chief executive Xavier Rolet outlined the most dire threats should officials fail to implement an orderly transition out of the European Union. Rolet said the impact would not just lead to 232,000 job cuts and the loss of the UK's vital clearing business, it would pose a risk to broader financial stability.
Allianz Global Investors vice-chairman Elizabeth Corley echoed Rolet's warnings on the need for a longer-term, "grandfathered" transition plan.
Financial services bosses have pleaded for a so-called “soft Brexit” that would somehow preserve access to the single European market as much as possible. While those hopes seem to have faded in recent weeks, the executives in their testimony today reasserted their desire for some sort of transitional agreement to be negotiated by prime minister Theresa May’s government to protect London financial companies. “What is required to maintain stability and customer behaviour, no disruptive changes, is grandfathering of the existing conditions for a limited period of time in parallel to Brexit negotiations,” Rolet said.
Key battleground
Euro-derivatives clearing has been a key battleground ever since Britons voted in June to leave the EU, with leaders from Germany and France threatening to strip those operations from London. A massive shift in trillions of dollars in risk assets and thousands of jobs could begin unless officials agree on a way to, at least temporarily, guarantee the existing framework, Rolet said.
The grandfathered period should last more than two years, he said. If euro derivatives clearing were somehow stripped from London, a rival to LSE could be the beneficiary, depriving the company of a lucrative business.
Since the referendum, Rolet has framed the issue as even bigger than the company he runs, saying it would hurt the financial industry as a whole and could even weaken all of Europe by driving jobs and services to New York.
He ramped up his warnings on Tuesday: Rolet had previously said 100,000 UK jobs were at risk if clearing were clawed away to another territory. On Tuesday he raised that number to 232,000, referring to an EY consultancy report, saying two-thirds of them were outside London.
The European Central Bank could mandate euro clearing to move, as it has tried to do before, or use regulatory details to effect the change, he said. Rolet warned in November that talks were already under way within the EU to limit euro clearing outside their jurisdiction, a sign of how badly the bloc wants London’s financial turf.
“Since basically the outcome of the referendum, we have seen calls by continental regulators to customers warning them of the risk euro clearing would be mandated to leave the UK,” Rolet said.
Flint warned Brexit could lead to not only London losing jobs in financial services, but Europe as a whole. Unless there is clarity soon on new arrangements, US investment banks will be loath to invest more capital in the region considering their home market and Asia are far more lucrative.
Flint said: “All of us are struggling with what we call Jenga – ie, are there individual pieces that don’t look particularly important, but are actually crucial to the underpin of the edifice of the cluster that exists today?” He referred to the clearing industry, one of the “major pieces,” which is “not the sexy piece, but effectively the most critical piece”. – (Bloomberg)
