News a couple of days ago that Credit Suisse had opted to re-house its European investment banking hub in Madrid away from London came as a bit of a jolt back to reality. A jolt that from September 2, there are just 85 working days left to the end of the year – and to the end of the Brexit transitional period.
Brexit has more or less gone off the main UK news agenda for most of this year. Most people are relieved. Before Covid-19 took over in January/February, politically-motivated, circular but above all interminable Brexit news, fake news and general Brexit drivel and dreariness right across the UK media had killed any conceivable interest in the subject for most UK citizens. After all, we’d had three and a half years of it.
Now we’ve had more than six months of Covid coverage of similar intensity. Dare I say it, I’m almost welcoming serious Brexit coverage back. And there is a serious point here: the absence of a trade deal between the UK and EU, the lack of comprehensive agreement on customs arrangements and other alignments heightens the threat of no-deal. Even if we are constantly being told a deal will emerge at the 11th hour, that remains to be seen.
The absence of a substantive breakthrough to-date should have been a mind filter for those in the financial sector whose Brexit planning could have been derailed by the pandemic. Survey after survey told us last year about the lack of post-Brexit preparedness. How Brexit planning and potential relocation plays into the working-from-home phenomenon brought about by Covid-19 is anyone’s guess.
For financial services companies offering products and services from the UK, the end of the transitional period is pretty binary: after December 31st, it will be illegal for them to offer services into the EU from the UK as the passporting regime will fall away. Given that a huge amount of EU financial services provision, from derivatives clearing and securities trading to corporate finance and capital markets to payments to asset management, currently comes from the UK, the risk of interruption of service is real. That has to be a genuine concern to both sides of this conversation.
Communications from the European Banking Authority and the European Commission speak to concerns on the EU side. The EBA had urged financial institutions a few weeks ago to finalize preparations for the end of the transitional arrangements. The EC issued a notice to stakeholders in early July to force the topic back up the agenda.
The end of passporting means that to ensure continuity, financial institutions will have to have all the EU licences they need before year-end, including for branches already operating in the EU. And it’s not just about licencing. The EU reasonably wants real operations on the ground, not brass plates. That means asset managers, insurers, banks, payments companies, clearing houses, brokers, rating agencies et al. will need to put in place adequate management capacity in an EU location, including technical risk management capacity where relevant.
This capacity, the EBA reminded stakeholders, needs to be commensurate to the magnitude, scope and complexity of their activities. In case FIs fancy outsourcing some of the required activities, the EBA cautioned them against reducing their operating units to empty shells. They will have to increase their EU footprints in proportion to the amount of business they carry out in and from the EU.
Financial institutions have, of course, been actively working on establishing the required infrastructure for the past two or three years. Indeed, the EBA acknowledged the significant action taken by many financial institutions. But “there is no room for complacency,” it warned, “even for those institutions that have already obtained all necessary authorizations and permissions.”
“Financial institutions should pay attention to a number of areas where further action stills needs to be taken. In particular, these include changing and moving contracts and clients, systemic exposures to UK-based financial market infrastructures and access to funding markets, including possible related capital impacts. Institutions should also assess and take necessary actions to address any impacts on rights and obligations of their existing contracts, in particular derivative contracts,” the EBA noted.
Logistics and executive teams have been scouring alternative European locations ever since the 2016 UK referendum with a view to re-housing those of their UK-based operations that have to relocate. Searches included not just availability of sufficiently sizable office space but quality-of-life issues including provision of quality education, availability of quality housing, decent restaurants, quality of transport infrastructure, etc.
Jobs have been transferred piecemeal out of London over an elongated period, but there have yet to be any wholesale shutdowns and forced mass relocations. One of the thorny subjects for those moving out of London into European locations has been adjustment to local compensation norms. London-based investment banking staff, for example, are simply paid a lot more than peers in other cities.
The big firms decided some time ago on where they are going to house their hubs post-Brexit. But most will house specific businesses where it makes most sense so will maintain dispersed campuses. A lot of asset and wealth management and private banking, for example, will go to Dublin and Luxembourg, for obvious reasons.
For the UK banks, Barclays has set up its EU hub in Dublin, HSBC in Paris, Lloyds Banking Group in Berlin, NatWest in Amsterdam and Standard Chartered in Frankfurt. Deutsche Bank will naturally relocate jobs to Frankfurt. UBS has also opted for Frankfurt, as have Citigroup, Morgan Stanley and Goldman Sachs (the latter alongside Paris). JP Morgan and Wells Fargo will favour Paris while Bank of America will use Paris and Dublin. BNP Paribas and Societe Generale already operate London-Paris poles so will simply bring back more roles to Paris.
A potential second Covid wave notwithstanding, getting Brexit plans completed on time is critical for continuity in European financial services. The clock is ticking.