Theresa May has years to negotiate an exit from the European Union, but finance executives like Philip Gough don’t have that luxury.
The chief of Convergex Ltd.’s U.K. brokerage is looking at a move to Dublin from the City of London as a way to keep unfettered access to the EU. Though the operation only employs 26 and rents about 3,000 feet of office space, multiply that by a few hundred and it’s easy to see why the stakes are so high for Britain’s economic engine with years of negotiation and obscurity looming.
“The U.K. is coming to the table saying we need more control over immigration,” Rupert Harrison, who was once chief of staff to now former Chancellor of the Exchequer George Osborne and now at BlackRock Inc., told Bloomberg Television. “The EU will say in exchange you will have less access to the single market, and I think the first sector on the list is financial services.”
As May takes office as U.K. prime minister following last month’s Brexit vote, companies like Convergex aren’t waiting for the dust to clear. They’re hunting in the fine print for possible solutions. The ramifications are huge. The financial industry employs more than 2 million people in the U.K., while 87 percent of U.S. investment banks’ EU staff are located there, according to New Financial, a think tank.
While Bats Global Markets Inc., which operates the region’s biggest stock exchange, says it’s also considering opening a European office outside of the U.K., law firms have pointed out that EU rules themselves may offer a partial answer.
The EU’s MiFID II market regulations, slated to be implemented in 2018, are an example. The U.K. could ask the bloc to recognize its own laws and regulatory and supervisory systems as equivalent. If successful, Britain would be able to offer specific services as a “third country,” similar to how the U.S. does it.
If that seems complicated, it’s probably even harder than it sounds. There are many hoops and layers, and it’s likely to be slow. The U.S. has run the equivalence exercise for some services and the process took years. And it wasn’t even going through a divorce with the EU.
“It’s not a basis for planning the future,” Gough, chief executive officer of Convergex’s London brokerage, said of the MiFID rules. “It’s far too uncertain.”
Another option is the so-called Norway model, which means joining the European Economic Area. That would resemble the U.K.’s current arrangement but would give EU workers wide access to the British labor force. That may be a non-starter following a pro-leave campaign whose key rationale was curbing immigration.
That’s why lawyers have been talking about the equivalence possibility.
There are many hurdles for equivalence. For one, the European Commission, the bloc’s executive arm, has the say on whether the third country’s regulations are equivalent to the EU’s and whether necessary arrangements are in place between the relevant regulators. The EU may be reluctant to grant equivalence status easily while Brexit negotiations are taking place.
“The question of access to the single market for financial services will definitely be a big and controversial topic,” said Markus Ferber, a lead lawmaker on financial policy in the European Parliament. “From an EU perspective, it would be outright stupid not to use it as leverage in order to get concessions in other areas.”
Equivalence recognition would have to be approached piecemeal, because there’s no single, global agreement for financial services, Ferber said. “This makes the process even more burdensome,” he said.
On top of that, the commission doesn’t even have to make a decision on equivalence, said Sharon Bowles, a former head of the European Parliament’s Committee on Economic and Monetary Affairs and a non-executive director at London Stock Exchange Group Plc. That means an application could, in theory, be left hanging. Moreover, member states have to approve the equivalence decision by vote, she said. After that, firms must register with European Securities and Markets Authority, a process that can take up to 180 days.
And that isn’t even the final step.
“You still need to notify the regulator in each member state where you want to do business,” she said in an e-mail. “This is meant to be a formality, but it does imply a degree of interaction is needed with regulators other than ESMA. I’m sure they might have questions following each notification.”
Equivalence wouldn’t be enough for JPMorgan Chase & Co. Retaining the passport is crucial for the U.S. bank, otherwise it might have to relocate a few thousand of its some 16,000 employees in the U.K. to other offices in the euro zone, Chief Executive Officer Jamie Dimon has said.
Others are more able to sidestep the EU location challenges posed by Brexit. ICAP Plc CEO Michael Spencer said Brexit will barely affect the structure of his company, though some sales staff might have to be moved to Paris or Frankfurt.
But Convergex doesn’t necessarily have that flexibility. CEO Gough said he hopes the U.K. will some day manage equivalence agreements so he can service his EU clients from London. But he’s not counting on it.
“We know that is far from certain,” he said. “And we therefore have to plan, at least, for the alternative.”