Banks hedge bets on Brexit but hope for the best
16 Dec 2020

Deal

People in the financial services industry believe they effectively went through a hard Brexit four years ago. As talks have dragged on over a free-trade deal, banking, insurance and asset management have not formed a big part of the discussion.

Even if a deal for manufacturers is hammered out before December 31, the financial sector has already made arrangements for the future when access to the EU will be much more limited.

David Oldfield, head of commercial banking at Lloyds, told MPs this week that the bank has combed through its activities “product by product, jurisdiction by jurisdiction, customer by customer. It has been a very detailed piece of work.” Lloyds has 13,000 expat customers with current accounts and credit cards that it will not be able to serve from January. Other banks are hoping to use “passive servicing” — keeping accounts open with limited services — but it is not known whether this will be viable in the long term.

Within the EU, UK companies could use a “passport” to do business across the bloc on the same terms as in the UK, offering products ranging from savings and mortgages to large loans and contracts to hedge currency movements to businesses. Brexit ended that, prompting companies to hope they could use “equivalence” rules that allow countries whose rules are as robust as those of the EU to have access to its markets. But as trade talks have been mired in disagreements, negotiations over equivalence have become increasingly gloomy.

Most big banks have also set up entities within the EU to serve big business customers with cross-border activities, which has meant moving 7,500 jobs and £1.2 trillion of loans and other assets so far, according to the accountants EY.

The sector emphatically does want a trade deal, partly because it would create more positive economic sentiment, according to John Liver, co-head of EY’s financial services regulatory network. Benefits to other parts of the economy would help financial companies too. Good terms on trade could also clear the way to progress on equivalence in the future. Emma Reynolds, managing director of public affairs at TheCityUK, said: “A deal keeps the door open to other agreements.”

No deal

The immediate fear for the financial sector is chaos on roads, at ports and in the air, creating turmoil in the markets. Andrew Bailey, governor of the Bank of England, has promised to take drastic action if necessary. “We have a substantive array of responses that we will put to work,” he said this week. “What has the Bank of England got in its armoury? The answer is, a lot.”

The lack of an arrangement for companies to move customers’ data across borders would be a problem for the financial sector. New contracts have been written for such an outcome, but there could be glitches or legal problems.

London is the biggest centre in Europe for the trading of derivatives, which allow businesses to hedge against currency movements and other risks. EU banks will have to move their derivatives trading out of London, probably to New York, unless regulators soften their stance.

In the short term, that exodus could bring disruption and higher prices. In the longer term, jobs would be at risk. The big question for the financial sector is whether London will still be a global hub.

The consultancy Oliver Wyman forecast in 2016 that up to 75,000 jobs could be lost in a worst-case scenario. So far, however, the number has been small. Nicolas Mackel, chief executive of Luxembourg for Finance, said: “The real effect on activities and jobs will be felt over a longer period of time. This will be a slow erosion rather than an abrupt change.”

By Katherine Griffiths, The Times, 16 December 2020

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