Posted on Oct 10, 2017
Two senior business figures have spoken out in recent days about the need for clarity for the banks regarding a transition deal between the UK and the EU, in order to prevent firms moving jobs and business out of the UK, writes Dmitry Leus.
Both Sam Woods, a deputy governor at the Bank of England, and Howard Davies, Chairman at the Royal Bank of Scotland (RBS) have emphasised the need for speed, but they differ on just how long the UK government has got before more significant numbers of banking jobs start to leave London.
Sam Woods said in a speech at London’s Mansion House that firms would activate their Brexit contingency plans if there was no deal on a transition period by Christmas (December 2017) which would lessen the impact of a hard Brexit in March 2019. He also repeated his concern about the likely strain on the Bank of England’s ability to supervise the financial sector as a result of the changes firms needed to make. He added: “If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Firms would start discounting the likelihood of a transition in the central case of their planning”.
Howard Davies of RBS seems to think the government has slightly longer to agree the transition deal, with the date he states being in five months time, taking us into March 2018. He may be slightly more generous in his timeline, but he was still very clear in his interview on Sky News that there will be growing consequences if no deal is reached soon: “If there are no details by the first quarter of next year, the number of moves of people out of London will accelerate. If nothing is certain by then I think people will trigger those contingency plans” he said in his television interview, referring to the plans the Bank of England requested from banks.
Sam Woods said in his speech that the first stage of contingency plans on jobs would be “relatively modest”, with most of the initial tasks focused on setting up new operations in the EU and receiving regulatory approval.
Contingency planning is a sliding scale of increased commitment, investment and momentum through time. It much more prudent and prosaic than hovering over the relocate button or rushing to the exit door.
The UK’s Prime Minister Theresa May last month proposed a transition period of about two years to maintain trade ties to the U.K.’s biggest market and give businesses additional time to adjust to the new regime.
One of the major challenges for banks is London is an EU rule that allows a bank to locate a fully regulated entity on one EU member state and operate across other states without the need for additional local regulation in the other countries. This is commonly called 'passporting.'
This practice allowed London to be very much the financial hub for the rest of Europe. Indeed, a large proportion of Europe's hedging, foreign exchange, lending and securities transaction have taken place in London.
The big challenge facing banks is how to manage the future of their European business once London is no longer a part of the EU. This is a key issue the banks are planning for and want precise information about.
Howard Davies and Sam Woods are of course right to warn that clarity is needed quickly before more banking jobs leave London. But we are still talking about relatively small numbers. To date, no single European city has quite emerged as a replacement for London. The banks are varying in where they choose to move these operations. Yes Frankfurt has been successful in luring quite a few banks, but not without a healthy showing from other cities.
We still should not overplay these comments and other announcements by the banks. None of these institutions are abandoning London. They are just planning for the possibility that certain, specific operations could have to be conducted elsewhere. The fact that Citigroup's 'move' actually only entails a mere 150 of its 6000 strong UK workforce shows that there really is still no exodus and nor is there likely to be.
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