The No. 1 Canada Square skyscraper stands surrounded by office buildings in London. Photo / Simon Dawson
The No. 1 Canada Square skyscraper stands surrounded by office buildings in London. Photo / Simon Dawson
Banks were encouraged that they have not been forgotten by Prime Minister Theresa May, who called on European Union governments to strike a "bold and ambitious" free-trade deal encompassing the financial industry as she triggered Britain's exit from the bloc.
The prime minister highlighted the need for "implementation periods" forfinance, a frequent demand for a post-Brexit transition from bankers, as she submitted a letter to EU President Donald Tusk Wednesday invoking Article 50 of the Lisbon Treaty. That formal mechanism sets the UK on course to leave the bloc in 2019.
"We have been reassured that in the conversations we've been having on both sides, there's a sense of avoiding any dislocation as a result of this process, which does seem to be very much front of mind," said Miles Celic, chief executive officer of TheCityUK, an industry lobby group.
"There's a recognition of the role the industry plays in driving broader European growth."
May's speech to Parliament as she triggered Article 50 struck her softest tone toward banks, after previously rejecting demands from the industry for special treatment.
However, a trade deal on financial services faces a tight timetable, resistance from some EU officials, and a lack of any comparable precedent.
At stake are tens of thousands of jobs for Britain and significant costs for the banks.
May might not even be able to start negotiating right away. Tusk insisted the first phase of talks must focus only on "key arrangements for an orderly withdrawal," rather than terms of the future partnership.
In an early sign a trade deal encompassing finance may be hard to achieve, the European Parliament, which must rubber-stamp any Brexit deal, said in a draft resolution that it would be illegal to grant "any privileged access" for U.K.-based financial companies which came at the expense of the region's regulations.
"If the UK succeeds in agreeing the sort of trade agreement with the EU that the PM wants, it will be a first in global trade," Phillip Souta, head of policy at law firm Clifford Chance.
"Until yesterday, the UK dictated the pace. Now it will be the EU 27."
If the UK succeeds in agreeing the sort of trade agreement with the EU that the PM wants, it will be a first in global trade.
The financial services industry and related sectors employ more than 2.2 million people across the UK, generating 71.4 billion pounds ($89 billion) in taxes in the last fiscal year alone. A high proportion of EU financial market activity is concentrated in London, particularly in wholesale markets, accounting for about 80 per cent of the trading in currencies and over-the-counter interest-rate derivatives.
The City of London is home to more than 250 foreign banks, and accounts for 17 per cent of all international bank lending.
"The Europeans have made it very clear, many times, that we can't have as good a deal as we have at the minute," said Graham Bishop, a British consultant on EU integration and former banker who started his career in finance in 1971.
"It's madness" to expect the EU to give the UK financial services a better deal, he added. It took the EU more than seven years to agree on a free trade deal with Canada that encompassed the financial services industry, though to a much lesser extent.
The agreement came close to collapse after Belgian politicians threatened to veto it at the 11th hour. A disagreement over whether to include financial services in an EU trade pact with the US contributed to the talks stalling.
British Prime Minister Theresa May departs 10 Downing Street. Photo / Getty Images
"In two years it's going to be very tough to get any sort of free-trade agreement," said Guntram Wolff, director at the Brussels-based Bruegel think tank.
"The problem she faces is that she needs unanimous support from all the EU member states, and that's going to be very tricky."
Banks have largely given up hope that they'll maintain the passporting rights that currently grant them unfettered access to EU clients from London. Analysts expect the UK to pursue access to the trading bloc through a broader version of third-country equivalence, which recognises financial market rules and oversight in some non-EU nations are as tough as those in the EU.
There is doubt over whether banks would even view that as a permanent solution, given that equivalence can be revoked if EU and UK financial rules diverge after the split.
The new deal "should be of greater scope and ambition than any such agreement before it so that it covers sectors crucial to our linked economies such as financial services and network industries," May wrote in the letter. "People and businesses in both the UK and the EU would benefit from implementation periods to adjust in a smooth and orderly way to new arrangements."
The problem she faces is that she needs unanimous support from all the EU member states, and that's going to be very tricky.
Banks are seeking to give their employees some sense of a plan while acknowledging that the legal and regulatory landscape for the industry will depend on how the negotiations progress.
JPMorgan Chase will "maintain a large presence" in the UK regardless of the outcome of Brexit talks, but "there will inevitably be some staff who will be asked to consider relocation," investment bank head Daniel Pinto and asset management CEO Mary Callahan Erdoes said in an email to staff Wednesday. Goldman Sachs Group similarly said it will keep London as its main European base while making changes to staffing levels.
"We have a tightly defined team implementing these contingency plans which will involve upgrading various European locations, including acquiring additional real estate, securing access to market infrastructure and applying for additional licenses to conduct business," Goldman Sachs's co-head of investment banking, Richard Gnodde, said in a voicemail message to staff on Friday.
At Morgan Stanley, senior leaders have been drafting plans for a year to adapt the bank's businesses depending on how Brexit plays out -- such as leaning more on operations it already has across the Continent.
"Our franchise and presence in Europe gives us many options and we intend to fully leverage those offices and licenses that we already have," Rob Rooney, CEO of Morgan Stanley's international business, told staff in a memo obtained by Bloomberg. "As prudence would dictate, we have been preparing for a worst-case scenario, in which we would need to establish a more significant entity within the EU 27."
