Sectoral Insight: Banking and Finance
Banking on Brexit
The depths of the impact of a possible hard Brexit continue to emerge. The respected consultancy Oliver Wyman, who have been analysing the issue over the past year, released their latest report estimating that up to 40,000 UK banking jobs could leave its shores. The fragmentation of the wholesale banking market could increase banks’ costs by up to 4% and require a further $30-50bn in extra capital to build their new business models.
Meanwhile, Bank of America has announced that it will make Dublin an important hub post Brexit, Morgan Stanley has picked Frankfurt and could relocate about 200 staff there, Citi has indicated it will beef up its presence in the city, and Deutsche Bank has earlier in the year signaled that up to 4,000 roles could move to Germany.
From the regulators, the head of the Financial Conduct Authority Andrew Bailey has also argued for a sensible transition period and warned that the time is fast approaching by when firms will have to have committed to move to guarantee continuity of business post-March 2019. Bailey also made a strong argument for regulatory equivalence between the UK and the EU post-Brexit and for the thorny issue of clearing to be based on ‘joint oversight’ not physical relocation. In Parliament, the new head of the Treasury Select Committee Nicky Morgan has asked the Bank of England for an analysis of the City’s preparedness and for the Bank’s transition plan.
The Grayling View
Firms are voting with their feet. The lack of any transition deal or even outline deal means that the financial sector has had to react fast. Who knows if their hard cash will have been well spent? They cannot afford to risk a hard Brexit and the loss of passporting rights in two years’ time. What is less clear is the impact on the European financial system as a whole. The UK’s loss is not necessarily the Continent’s gain. Brexit is forcing banking chiefs to reassess their global business models. Just as in the auto sector, Brexit may see production moving outside the EU completely.
The highlights from the UK:
Lords on tour get a taste of transition
Avid Brexit Bulletin readers will remember that when the Labour Leader Jeremy Corbyn infamously visited Brussels on 12 July and presented a rather nonplussed Michel Barnier with an Arsenal football shirt, the EU’s Chief Negotiator also met with Members of the House of Lords EU Select Committee. The Select Committee has kindly published verbatim transcripts of this hearing, as well as another with the European Parliament’s lead Brexit representative, Guy Verhofstadt.
In his evidence to the Peers, Barnier made sure to focus on the importance of ensuring that ‘trust’ remains at the heart of the relationship between the UK and the EU-27. For Barnier ‘trust’ implies that the UK fulfills its financial obligations and desists from the temptation of lowering regulatory, tax and environmental standards post-Brexit. Barnier also informed the Lords that the EU’s transparency policy and his consultation strategy across the EU-27 are aimed at fostering public support for the ratification of the eventual trade agreement, which will be a mixed agreement (i.e. one requiring the consent of national parliaments as well as the European one, which could make it a tricky affair).
For his part, Verhofstadt provided the Select Committee Members with a clarification on how the European Parliament will handle Brexit. The Constitutional Affairs Committee (AFCO) will be asked to prepare the Opinion that will form the basis for the MEPs' consent motion. Hence AFCO Chair Danuta Hubner’s membership of the Brexit Steering Group. Verhofstadt also revealed that the European Conservative and Reformists (ECR) political group are clamouring to be given a seat in the Group, the membership of which is currently restricted to the Presidents of the political groups that backed the Brexit resolution passed by MEPs in early April. Tantalisingly, Verhofstadt would only say that the ECR’s candidate is Italian – the ECR’s President Syed Kamall, as a British citizen, is deemed unsuitable.
The Grayling View
These transcripts are in themselves well worth a read with some amusing banter between the Lords and their ‘witnesses’. It is heartening to see that the Lords are providing effective Brexit scrutiny on behalf of Parliament. The Verhofstadt transcript reveals that the ECR are preparing for life without the Conservative Party – its largest source of MEPs.
However, in terms of content it is the Barnier transcript that offers the most insight. To our knowledge it provides the first indication of the EU Chief Negotiator's thinking on transition, which is now firmly on the agenda in London and Brussels. Whilst reiterating that any transition period must be clearly time-limited, Barnier also stated that it should be “short”. More interestingly, Barnier revealed that transition would involve two distinct elements. “Phasing-Out” elements – membership of Europol and Euratom for instance – and “Phasing-In” arrangements on the future relationship. What precisely this differentiation implies and how it could be made to work legally is still unclear. Any evidence that Barnier is thinking about the shape of transition will in any case be music to the ears of businesses.
The highlights from Brussels:
Davis visits Germany’s Brexit Achilles Heel - Bavaria
David Davis, the UK’s Brexit Secretary, was in Munich on 26 July for talks with Bavarian Premier Horst Seehofer, leader of the Christian Social Union (CSU) the regional sister party to Chancellor Merkel’s Christian Democratic Union (CDU), about a post-Brexit relationship.
Bavaria, Germany’s second-most populous state, has particularly close economic ties with the United Kingdom. The informal meeting between Davis and Seehofer appears as an opportunity to assess what can be done in particular sectors and how the CSU could influence the overall German position on Brexit.
The CSU appears to be more divided on Brexit than the big two nationwide parties because so much more is at stake with Brexit for Bavaria. After the US and China, Britain is the most important market for Bavaria's economy. The export volume, according to the state government, amounted to about €15 billion in 2016, half of which stems from automotive manufacturing. On the other hand, the UK is ranked 10th in the Bavarian import balance with imports of €5.6 billion.
It should therefore come as no surprise that Seehofer has repeatedly stressed the importance of a quick conclusion to a comprehensive trade deal between the EU-27 and the UK.
The Grayling View
David Davis will be well aware that Bavaria and the CSU represent the closest thing that Germany has to a Brexit achilles' heel. With one of the Brexiteers' favourite tropes being that the German automotive industry will force Merkel to be ‘pragmatic’ and though she put pressure on Barnier to give the UK a ‘good’ deal, it is unlikely that Davis will have overlooked this potential ally. The Chancellor must accommodate the CSU’s interests, although Barnier will certainly sleep more easily should the German election result in the status quo or an increased majority for the CDU.
The highlights from Australia:
Australia keen on a deal – but wants something in return
Discussions have begun between Australia and the UK with the aim of better facilitating travel to the UK for Australian citizens. Australian High Commissioner (Ambassador) to the UK Alexander Downer said this week that the country is developing a “scoping paper” on a possible trade agreement with the UK and that visa liberalisation would be “on the table”.
Downer stated that Australia “wouldn’t be looking at completely free movement like the UK currently has with the EU. But we would be looking at making it easier for business and professional people, academics and the like to move more easily between Australia and the UK in both directions”.
Immigration however remains a sensitive topic for the UK. As a UK Ministry source said: “The sensitivities around migration are very significant. I don’t think anyone would expect we are going to recognise concern about migration of free movement from Europe and not pretend it isn’t an issue with the rest of the world. What we are not going to do is start replacing one free movement deal with a free movement deal with India, for example. It is not on the cards.”
The Grayling view
The Commonwealth countries – including Australia and India – will hope to be first in the queue for a trade deal, but they will expect something back in return, most likely in the form of free movement – and here lies the rub. There appears to be an inherent contradiction between being a champion of global trade and closing borders to immigrants, and it is not yet clear how this can be reconciled. Failure to give something back to the Commonwealth may jeopardise a future deal with these countries and do longer term damage to the UK’s reputation within the Commonwealth.
Dates for your diary
w/c 28 August 2017 - Third Negotiating Round
5 September 2017 - GBU Brexit Breakfast Club
7 September 2017 - European Union Withdrawal Bill Second Reading
11 September 2017 - European Union Withdrawal Bill Second Reading - Vote
w/c 18 September 2017 - Fourth Negotiating Round
24 September 2017 - German Federal elections
28 September 2017 - GBU Workshop - 'The Weakest Link? Brexit and your Supply Chain'
w/c 9 October 2017 - Fifth Negotiating Round
19-20 October - European Council Summit
1 January 2018 - Bulgarian Presidency of the Council
1 July 2018 - Austrian Presidency of the Council
End of October 2018 - Negotiations expected to end
Autumn 2018 - Spring 2019 - Possible Scottish independence referendum
1 January 2019 - Romanian Presidency of the Council
March 2019 - UK expected to leave EU
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