The full consequences of the Brexit are not entirely known. However, one result leaves major banks with a big decision. That decision may be to leave London for a more favourable city.
What could cause London to lose ground as a financial centre?
The issue focuses on a concept of passporting rights. As reported by the BBC, passporting rights allow banks to complete transactions with other members of the EU. Currently, access is free-flowing, allowing banks from member states to function as though they exist within a single country. This helps limit the need for licenses to operate across multiple countries. Further, it effectively streamlines banking activities.
Why would Brexit affect passporting rights?
At this time, the UK remains a part of the European Economic Area (EEA), a group of 28 EU states and Norway, Iceland, and Liechtenstein. If the UK is not included in the single market once Brexit is complete, it will lose rights granted by the EU. This change could require London-based banks to obtain licenses to operate in each country. Considering the number of countries involved, this is no small task.
Is there another way?
To avoid such dramatic moves, London-based banks are counting on a potential new financial services law. The alternative for banks with widespread operations is to relocate their headquarters. This moves their primary functions into a country that is in the single market. Essentially, any country within the EU or EEA is an option.
Frankfurt may be a particularly attractive choice. Not only would newcomers likely be welcome, Frankfurt is also a financial centre in its own right. The city also hosts a number of key regulatory and supervisory bodies. This makes it a choice location for many businesses operating internationally within the EU. By relocating their headquarters, these banks would not automatically lose their ability to operate within the UK.
Are the moves guaranteed?
If enacted, the EU would be able to recognize banking institutions whose regulatory requirements are as stringent as its own. This provides UK-based banks with a way to work passed the change in status. Banking functions would be able to proceed as they do today.
If the EU doesn’t adjust the financial services laws, the UK will fail to meet the requirements for membership in the single market. The primary requirement, a major point of contention that led to the Brexit voting results, is the free movement of labour. The UK considered leaving the EU based on concerns about immigration.
What is the status of Brexit?
Negotiations on what Brexit will ultimately mean have not yet begun. British Prime Minister Theresa May plans to use Article 50 of the EU Treaty at the end of 2016. Once begun, the full process is scheduled to take two years. Pressure from UK residents may leave a “hard” exit on the table. In that case, all connection with the EU are severed. This leaves the UK autonomous.
Today, banking operations in the London financial centre account for approximately 12 percent of the national economic output.