U.K. Prime Minister Theresa May needs to give City of London banks maximum certainty on how they will be treated after Brexit or risk seeing them flee Britain and perhaps even Europe, according to Open Europe.
In a report Monday, the think tank recommends May push for a bespoke deal with the EU that ensures banks in the U.K. retain access to the bloc’s single market and offer reciprocal access for banks on the continent. It also says she should strike an interim agreement with the European Union that would preserve banks’ ability to provide services on broadly similar terms to now beyond the two-year negotiation period.
“The clear priority for the government is to maintain passporting or something close to it in wholesale banking,” said Stephen Booth, acting director and director of policy and research at Open Europe. “The risk is there is contingency planning by banks who don’t want to be in a cliff-edge situation.”
Bank executives are planning for the worst — an outcome where they lose the right to sell services freely around the EU from London — and will start moving jobs and operations out of the U.K. within weeks of the start of formal talks over the U.K.’s withdrawal, expected in March. They are concerned that May will prioritize immigration over the needs of the City in her negotiations with the EU.
“A transitional agreement to keep the existing reciprocal passport arrangements in place would allow the industry greater time to plan and the U.K. government to negotiate alternative arrangements with the EU,” Open Europe said in the report.
If Europe’s capital markets splinter after Brexit, more business may migrate across the Atlantic to New York, the only other one-stop shop for firms seeking financing, the authors argue.
U.K. lawmakers need to do a better job of convincing their EU counterparts that keeping Europe’s capital markets open and intact is a matter of mutual interest for all involved, the report said.
“The U.K. should make it clear to its European partners that this is not a ‘zero-sum game’ and think creatively about how to ensure that the new trade arrangements benefit EU companies and governments,” the report said. “Fragmenting London’s financial services ecosystem would lead to higher costs for all concerned.”
Losing that access to the single market could cost banks in the U.K. as much as 27 billion pounds ($33 billion), or a fifth of their annual revenue, the report said.