UK: Government not greatly worried about Brexit risk for financial institutions – Natixis

René Defossez, Research Analyst at Natixis, explains that UK financial institutions have to submit their contingency plans to the Bank of England (BoE) by 14 July as at the start of April, the Prudential Regulation Authority (PRA) warned that several institutions seemed ill-prepared to the different possible Brexit scenarios.

Key Quotes

“In recent weeks, matters appear to have gathered momentum and light is starting to be shed on the possible behaviour of these institutions. In recent days, several banks have made known publicly their intentions. At the start of the week, E&Y published the findings of its latest survey on the banks’ intentions. Another report published by Freshfields Bruckhaus Deringer, which was commissioned by TheCityUK, deals with the legal impact of Brexit on the UK-based financial sector. It provides a fairly precise insight into the constraints that could be faced by financial institutions.”

“What emerges generally from these studies is that banks and other financial institutions will seek to strike the best balance between:

1. Maintaining as much of their activities in the UK as possible; and

2. Continuing to serve European customers with as little disruption as possible.”

“They are very largely favourable to there being a transitional period once the initial two-year period provided by the texts ends. In many cases, they want grandfathering rights to be guaranteed. Finally, they want continued access to the pool of qualified staff on the Continent.”

“Obviously, the behaviour of financial institutions will depend on the type of Brexit, and contingency plans are supposed to cover all eventualities.”

“E&Y has found that more than 25% of financial institutions are expected to move part of their staff to the Continent in reaction to Brexit. This proportion rises to 45% in the case of investment banks. At the same time, 34% of the institutions surveyed said they had not yet reached a decision.”

“In the EU27, there is not currently an ecosystem equivalent to the City. If there is a relocation of activities, the most likely scenario is that there will be a fragmentation. From a rationale founded on concentrating activities in a very favourable ecosystem, there would be a shift to a rationale based on being as close as possible to the customers (from a geographical standpoint, a legal standpoint, etc.).”

“Furthermore, the EU is very clearly making preparation for the repatriation of euro-clearing activities. Very precise studies have recently been published on the management of this transfer.”

“Finally, the EU has clearly stated its intention to relocate the EBA, which is located in the City, where it has a staff of 159. The EU considers that the relocations of the EBA and other European agencies (such as the EMA) do not enter into the scope of the Brexit negotiations, as they are a consequence of Brexit.”

“Lloyd Blankfein (Goldman Sachs) warned on Wednesday that the City could “stall” as a result of Brexit. This is indeed a risk, but as yet, the government is not overly concerned. Right now, the Conservative Party’s short term preoccupation is to strengthen its Parliamentary majority, which it will probably accomplish. However, the Conservative Party is mistaken if it believes that strengthening its domestic standing will increase its negotiating clout with its European partners.”

“In France, the Netherlands and Germany, Eurosceptic parties met with defeat in national or local elections, the electorate voting for candidates that are clearly pro-EU and EMU. In France, Emmanuel Macron’s victory is not good news for the UK: France’s new President has made it clear no concessions will be extended to the UK, and he is even encouraging French expatriates living in the UK to return home. He also wants Paris to become more attractive for financial activities.”