Brexit games risk EU's financial efficiency
Europe’s politicians are stepping up their frenzied games of Brexit bluff. Last week Michel Barnier, the EU’s chief Brexit negotiator, gave Britain and its finance sector an ultimatum: set up new operations in the EU27, thus extending access to the single market, or strike a fragile Brexit deal based on “equivalent” market access and regulation.
The British government made clear last month that it is keen on a third way — a broad-based free trade deal, embracing services as well as goods. That idea has clearly been snubbed. The point was hammered home by Valdis Dombrovskis, who heads financial policy in the EU. At the European Financial Forum, co-organised by the FT in Dublin, he played another favourite game among Eurocrats: not answering the question. In a panel discussion, he was asked repeatedly whether a third way — based on free trade — was feasible. Such an option was not on the table, he insisted. Now was not the time to talk about it.
Sam Woods, the UK’s financial watchdog, is clearly frustrated by the game-playing. In an interview with the FT, published on Monday, the head of the Prudential Regulation Authority described the options — move to the EU27 or rely on equivalence — as “extreme” and “sub-optimal”. He questioned whether the only reason for an intransigent line from sections of the EU27 might be an “industrial policy objective”.
The third way of a free trade plan is just plain good sense for all, he added. “It doesn’t favour us particularly, because when you boil it down to what it is, it’s just a more efficient means of selling across the border . . . It is going to benefit the firms who do that . . . some British firms . . . a lot of firms from the EU27 and from the rest of the world.”
Mr Woods also got stuck into another of the Brexit games. Following a separate intervention from the EU27 last week — a paper that threatened post-Brexit sanctions against the UK if it pursued a policy of cutting taxes and ditching regulation — the UK regulator sought to reassure EU politicians that there would be no “bonfire” of financial regulation.
No doubt simultaneously disappointing some in the financial services industry who have argued that moves to loosen US regulations could leave the UK uncompetitive, Mr Woods said: “We will maintain standards of resilience in the financial sector at least as high as those we have today.”
What does all this mean for the big financial sector employers? Much like the pro-Remain campaign ahead of Britain’s 2016 Brexit vote, banks’ threats to move thousands of jobs out of the UK have been dismissed as scaremongering. In the case of a poor or no-deal Brexit, such a dramatic shift of operations and employment is still perfectly feasible. But it is true that for the time being there has been little or nothing in the way of big job moves.
At last week’s EFF, Morgan Stanley president Colm Kelleher said his bank would decide after Easter to trigger the relocation of several hundred people — to its new Frankfurt subsidiary and across continental European financial centres — unless political negotiators had by then reached agreement on a transition deal lasting two years or more.
With the March 2019 Brexit date looming, other banks are planning moves, too. Bank of America, according to insiders, is to shift about 500 staff: 100 of them to Dublin back-office roles, where its EU27 subsidiary is located; close to 400 to a new Paris sales and trading operation; and the rest scattered between Frankfurt, Milan and Madrid.
The Paris focus of BofA’s job transfers is a logical business decision. If it is not assured of pan-EU access to clients from London, then Paris is the next best hub, given the location there of a clutch of asset management companies (Amundi, Axa et al) for which its staff execute trades. Other banks, including HSBC, Goldman Sachs and JPMorgan have talked about the possibility of moving some jobs to Paris, particularly since President Macron’s ascent to power nine months ago.
Unless there is political progress soon towards the free trade Brexit deal that the government and the City of London are dreaming of, banks will just go ahead and reorganise their operations regardless. Mr Woods’ suggestion of an “industrial policy” aim at the heart of some countries’ negotiating position may have been proved. A short-term win for Paris, maybe. But a longer term fragmentary risk to the financial efficiency of the EU economy.