Fears of a Brexit crash-out return to haunt the City

Fears of a no-deal Brexit are gripping the City after Britain and the European Union failed to reach an agreement last week over future trade relationships between the two sides.

Finance bosses in the UK are bracing for “regulatory warfare” with the trading bloc as the clock ticks down to the end of Britain’s post-Brexit transition period on 31 December. 

Sean Tuffy, head of market and regulatory intelligence at Citigroup told Financial News that “the likelihood of a no-deal Brexit has [now] increased” as a result of the deadlock in negotiations.  

“Firms will likely be dusting off their contingency plans and operating under the assumption there will be no or limited equivalence,” he said.

Michel Barnier, Europe’s top Brexit negotiator, said on 30 June there was “no way member states or the European Parliament would accept” the UK’s bid to smooth access to European markets for London’s financial district after it leaves the EU. The UK’s chief negotiator David Frost said on 2 July that there remained “significant differences” between the two sides “on a number of important issues”.

If negotiators fail to reach an agreement, City firms could lose access to the European markets overnight and find themselves unable to serve their EU clients from London.

Jon Moulton, the veteran financier who founded the private equity firm Better Capital, told FN that if the two sides failed to co-operate on the issue, “then regulatory warfare with unpredictable, but mostly adverse effects will be the new normal”.

Meanwhile, 76% of respondents to a poll of more than 100 business and finance workers by research group FindOutNow believed a no-deal Brexit was now “somewhat likely” or “very likely”.

Analysts at Berenberg said they do not see a Brexit deal being reached by the end of the year, putting a 60% chance on negotiators switching focus to “limit the immediate economic and social disruptions” of a crash-out exit on 31 December. 

Sarah Hewin, chief economist for Europe and the Americas at Standard Chartered, puts the chances of a deal being secured by year-end at 50%. 

“Deadlines for reaching an agreement on financial services equivalence and extending the transition period have elapsed, and with Covid-19 still taking up much of the political and bureaucratic bandwidth of policymakers on both sides, time is tight for a new UK-EU trading arrangement to emerge by the year’s end,” she said. 

Michael Cole-Fontayn,  the chair of the Association for Financial Markets in Europe, a trade body, said “time is running out” to secure a Brexit deal.

“That’s why we are urging the EU and UK to put in place equivalence determinations and address regulatory challenges as soon as possible to minimise disruption to markets and businesses which will need time to adapt their processes and technology,” he said. “This is even more important in the current economic environment, where firms and their clients are facing the ongoing effects of Covid-19.”

A crash-out exit from the trading bloc would “add to the problems of many sectors suffering from Covid impact and will also touch additionally on sectors that have so far done ok during the pandemic such as the financial sector”, according to Vicky Pryce, chief economic advisor at the Centre for Economics and Business Research.

“Most firms are simply not prepared nor are they able to bear the extra cost involved in trading with the EU,” she said. 

The UK has long been pursuing a Brexit deal for financial services based on an improved version of the EU’s existing framework to non-members, where its regulators declare financial rules equivalent on a piecemeal basis. Barnier last week accused the UK of trying “to keep as many single market benefits as it can”, despite choosing to no longer be a member state.

Xavier Rolet, the former chief executive of the London Stock Exchange, told FN that negotiators on both sides of the debate risked ignoring the needs of major financial services institutions in Brexit talks.

“The simple fact that four years into Brexit, major financial infrastructure businesses are still in the dark about the future framework seems ample evidence that business planning considerations do not rank at the top of policymakers’ priorities,” he said.

A senior government affairs official at a global bank in London warned the current Brexit stalemate would accelerate banks’ planning for “the worst type of Brexit” and will encourage firms to move more of their London-based staff to the EU. 

“It’s not good. It’s a pity,” he said. “[But] we will do what we have to do.” 

“The risk of a no-deal Brexit for the UK, EU and global economies remains a key headwind. The UK government has so far not withdrawn from its threat to walk away without a trade agreement in place, despite the mass financial disruption caused by the pandemic,” said Nigel Green, chief executive and founder of the deVere Group, a financial advisor.

The UK and EU were due to decide by the end of June whether to extend that deadline to allow more time for negotiations, but UK Prime Minister Boris Johnson has repeatedly said he would rather walk away with no deal than prolong talks.

Under equivalence, countries outside the European bloc can secure limited access to the single market if EU regulators judge another jurisdiction’s rules to be as stringent as their own. But critics point out that it can be withdrawn at short notice and is open to manipulation for political purposes. The UK government hopes to improve on these arrangements – by securing the ability for City professionals to fly in and out of Europe for short-term stays, for example.

To contact the authors of this story with feedback or news, email Lucy McNulty and Shruti Tripathi Chopra

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