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By Steve Slater
LONDON, June 29 (IFR) - Investment banks are scrambling to establish how post-Brexit changesin the UK's "passporting" rights for financial services will impact their businesses, puttingthousands of jobs in London in the balance.
Passporting is considered the most significant feature of the EU single market for banks andother financial companies, allowing firms in one EU country to provide services to clientselsewhere in the single market.
But following Britain's vote six days ago to leave the EU, those arrangements could bescrapped, watered down or become the subject of negotiations for up to a decade.
There is little sign of a quick fix, and bankers are bracing for the impact.
Richard Gnodde, co-CEO of Goldman Sachs in Europe, said on Tuesday if Britain's financialpassporting was fully removed banks would have to change their footprints and where their peopleare located. The bank has said it needs to see the terms of Brexit before it can make firmdecisions, however.
There have been similar warnings from bosses at JP Morgan, HSBC and others, posing the riskthat banks from the US, Switzerland and Asia will shift staff out of London, currently used as abeachhead for their EU businesses. Frankfurt and Paris are the most obvious potentialbeneficiaries, bankers said, though Dublin, Amsterdam and other cities are keen to roll out ared-carpet welcome too.
"It is very likely that some coverage roles will have to move to the EU, as will a number ofmiddle and back-office roles relating to euro clearing and settlement. Whether trading has tomove is a more open question," said Simon Gleeson, regulatory partner at Clifford Chance.
Operations most likely to be affected are those related to Mifid II, the EU market rulescovering a range of products from derivatives trading to bond pricing, bankers said. But mostareas of capital markets activity will be affected.
More than three-quarters of capital markets' business across the EU is conducted in Britain.About 417,000 people are employed by banks in Britain, and there are another 1.8m roles in otherfinancial and professional services.
"ROOMS FULL OF PEOPLE..."
Senior banking sources say firms need to move relatively swiftly, even if decisions toactually move staff can be delayed for some time.
"We have rooms full of people looking at how we would cope if there wasn't EU passporting,"a senior banker in London said.
"No-one knows, so you've got to plan for the worst," said a person at another bank.
Banking trade bodies said they are holding "non-stop meetings" to discuss the issue. Bankshad lined up contingency plans, but some were half-hearted and few banks expected to use them,sources said.
Applying for a new banking licence in European cities can be a long and arduous process. Andbankers do not expect to be allowed to set up "letter box" or "brass plate" entities in aEuropean jurisdiction while continuing to carry out most of the work in London.
Rather, European Central Bank supervisors will demand full details on business plans,capital and liquidity projections, and legal structures - and will want the names of thoseexpected to run the operations. Those plans will determine the type of licence granted in aprocess that could take 6-12 months.
Politicians and lobbyists will be keen to convince those running banks to relocate to aparticular city but those considerations are unlikely to sway Daniele Nouy, the head of theECB's banking supervisory arm.
That could also mean there is a first-mover advantage for banks to act. About a dozen majorbanks could apply for new licences, and they will not want to be at the back of the queue in theECB's approval process.
Swiss banks, which face the prospect of having their two main European hubs outside the EU(in Switzerland and the UK), and some US banks almost wholly reliant on London, will be undermost pressure, sources said.
THIRD-COUNTRY REGIME?
Britain will negotiate financial passporting alongside its discussions with the EU on theterms of its exit from the EU. It will have two years to do so once it enacts Article 50 of theEU Treaty. Article 50 has not yet been signed and it may be months before that happens, assumingit ever does. Outgoing UK leader David Cameron said talks on exit terms could start before theformal notice to quit, but EU officials said that is not possible.
Britain effectively has three options once it formally leaves the EU: negotiate bilateraltrade agreements; join the European Economic Area; or trade under WTO rules.
The best option for banks is likely to be an arrangement under Mifid II rules effective2018, which allow "third-country entity passports", bankers and lawyers said.
These so-called "equivalence" rules allow banks in non-EU countries to have access to the EUif they have a similar regulatory regime to the EU and allow a reciprocal arrangement. It couldsignificantly mitigate the impact of Brexit on banks' activities, lawyers said.
The third-country passport regime is untested, however.
Even so, achieving a deal based around those rules will prove politically tricky. The EU islikely to be unwilling to extend such benefits to the UK if negotiations over the divorce areacrimonious, or if their are red lines on either side that do not allow for compromise.
"The Union would be expected to insist that as a condition for future access tothe EU single market on favourable terms, UK laws should be kept up to date in conformity withEU law under the European Court of Justice. This might not be politically acceptable in the UKafter the vote to leave," Paul Richards, head of regulatory policy for the International CapitalMarkets Association, said on a call with members on Tuesday.
The primacy of UK law and an ability to restrict immigration were key issues in Britain'ssuccessful "Leave" campaign.
The third-country passport process also does not cover all services and activities, withforeign exchange, deposit taking and private wealth management all falling outside its scope.
PLAN FOR THE WORST...
The worry about passporting rights is already weighing on banks, whose share prices havebeen hammered due to fears that Brexit will drag the UK into recession and create furtherstructural and revenue headwinds.
JP Morgan analyst Kian Abouhossein said investment banks faced "structural uncertainty suchas the risk of losing EU passporting, which would lead to net additional staff and costs forIBs".
For an industry where revenues are already under pressure, that is a further incentive toclarify plans.
"Banks will be under pressure from their clients to demonstrate that they are restructuringthemselves in order to continue to be able to provide services," Clifford Chance's Gleeson said.
"That probably doesn't allow them to maintain a wait-and-see posture for any extendedperiod. Thus we expect banks to execute restructuring fairly soon based on 'worst case' analysisof the possible outcomes of the exit negotiations," he said. (Additional reporting by Alex Chambers)
