Brexit brief: banks put contingency plans in place
With little guidance forthcoming from the Government, financial firms are factoring in a ‘no deal’ scenario, reports Lucy Burton
As Britain enters a key week in the Brexit negotiations, the country’s financial sector is losing interest in the Cabinet quarrels that have dominated talks this summer. Stepping back from the chaos and pushing on with its assumption that the talks will end in a worst-case scenario – no trade deal, or a so-called hard Brexit – the City is becoming tired of the political to-ing and fro-ing that could see it stung once Britain leaves the bloc.
“I’m not quite sure what Philip Hammond and Liam Fox were saying [on Sunday] – they appear to be giving something without defining what that something is,” says a senior executive at a large US bank, referring to the joint Sunday Telegraph article on Brexit, which was widely viewed as an attempt by the Chancellor and Secretary of State for Trade to put on a united front.
“It doesn’t matter if they make all sorts of nice noises saying it’s not this, it’s not that, in the absence of any clarity, everyone has to assume the worst,” the executive continues.
“Going into the election they at least appeared to have a position, one we didn’t like but at least knew where we were heading. Now it’s multiple positions, which is more unnerving.”
In his weekend piece, the Chancellor assured readers that Britain would definitely leave the single market and customs union when it exits the EU. But his words are likely to rattle some of the fund executives who spoke to Hammond about their Brexit concerns in Downing Street last month. Peter Harrison, the Schroders chief executive, for example, told The Daily Telegraph shortly after the discussion that Hammond knew “the issues very well indeed”.
For the big banks, the twists and turns are particularly unhelpful, as they need to act now so that they are ready for whatever the post-brexit world will look like.
Consultancy firm Oliver Wyman believes Britain could lose 40,000 sales, trading and investment banking jobs as a result of Brexit – half of the UK wholesale sector – with its financial services principal Patrick Hunt reiterating that banks cannot take a wait-and-see approach, unlike some in the financial sector.
“Banks have to be putting [contingency plans] into implementation now, others have more flexibility,” he says. “Asset managers have a lot of challenges, but don’t have the substantial capital migration, number of people in risk and control functions, [and their] IT systems don’t require such a long lead time as the wholesale banks.”
Brexit preparations are already transforming the UK’S financial services industry. Headhunters who have spent their entire careers placing people in the City are now trying to fill spots overseas, while London-based investment bankers are talking to their families about moving abroad.
London’s lucrative euro-clearing market is under threat as Brussels demands more control. Even the sea has come into the debate as tensions run high.
“Fishermen are not the only ones concerned about UK waters post Brexit, as the sea plays an equally important role to the financial sector,” says Fraser Bell, the chief revenue officer of market infrastructure provider BSO.
“More than 40pc of euro transactions run through a vast network of undersea cables from around the country,” he continues. “If the EU harbours any hopes of taking back control of euro trading, a huge network of cables would need to be built on the continent. To reroute these links would prove to be a monumental task – particularly if no transitional agreements are struck.
“A rip-and-replace approach would not only be hugely expensive, it would also mean a massive disruption to euro trading, which is the last thing the market needs right now.”
As Theresa May’s Government tries to hash out a deal, more and more corners of the financial services industry are starting to worry about their position come March 2019. The biggest concern is that the thousands of Uk-registered firms that currently rely on passports to service clients in the EU, and vice versa, lose that right with no time to adjust. The Bank of England last week backed calls for some form of implementation period.
Trade bodies are also pushing for a transitional deal, although one banking executive says it feels like their advice is going into a black hole. “All this evidence goes in and goodness knows what they’re doing with it,” he says.
“The most pressing and urgent priority for the industry right now is getting a binding agreement between the UK and the EU27 [the other members of the European Union] on a time-limited transitional period,” says Miles Celic, chief executive of industry body Thecityuk.
“Without any clear or concrete agreement in place, or on the horizon, firms are reluctantly starting to activate contingency plans to ensure they can continue to provide continuity of service to clients.”
Indeed, while the big banks have started their contingency plans, insurers and asset managers have also been forced to push on with their planning [see graph].
Nicolas Mackel, chief executive of Luxembourg for Finance, says two or three insurance companies are about to announce new EU hubs in the country, while a number of banks with offices in Luxembourg are currently looking to expand their wealth management or corporate finance teams there as a result of Brexit.
The smaller, Uk-focused outfits, which might not have been hashing out plans to open EU hubs a few months ago, are also mulling over options, with many concerned that uncertainty will hit investor activity.
“The key thing with us for Brexit isn’t so much lack of access to markets, it’s investment sentiment,” says Paul Feeney, Old Mutual Wealth’s chief executive, who will also be steering the wealth manager through an initial public offering in the year ahead.
“[The] operational impact is fairly modest for us, [but] we’re not complacent – we’re looking at all sorts of potential scenarios. If it’s a hard Brexit, would we set up a few more functions in one of the EU markets? If we needed to, we would. We could put a few more people in Dublin or Luxembourg.”