Banks Likely to Lose Passporting With Brexit, U.K. Official Says

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at 2016.10.26
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Banks Likely to Lose Passporting With Brexit, U.K. Official Says

Global banks will probably lose their current legal rights to provide services in the European Union after Brexit, the U.K.’s trade minister said in the most detailed outline yet of the government’s thinking.

Passporting, which allows London-based lenders and insurance companies to sell their services anywhere in the single market, is unlikely to continue after the U.K. leaves the 28-nation bloc, Mark Garnier said in an interview. He added that an alternative system that’s been floated, known as equivalence was probably not going to be “good enough” for banks.

Garnier, who is also government envoy for financial services, instead touted a better version of equivalence that might work well for London-based banks. The drawback is that Britain may have to accept all future EU regulations as they are handed down from Brussels, he said. Resentment toward EU bureaucracy and a backlash against immigration were drivers behind the June referendum.

“If we can create a special hybrid version of that, with a better version of equivalence or a different version of passporting, then that’s what we will try to achieve,” Garnier told Bloomberg News by phone. “What we are not trying to do is fit into an existing box. We are trying to create a new model.”

Asked if this meant passporting was likely to end but would hopefully be replaced with something else, he said: “Exactly.”

Click here for a guide to what passporting rights mean for banks.

At stake is conserving a key motor of the British economy that contributes about 10 percent of gross domestic product. Finance executives have threatened to move staff out of the U.K. if Prime Minister Theresa May and her team of Brexit negotiators doesn’t secure a deal allowing them to serve European clients from London.

Global investment banks such as JPMorgan Chase & Co. and Morgan Stanley have the most to lose as they operate European business out of London and don’t have the same links to the continent as local lenders such as Societe Generale SA and Deutsche Bank AG. The British Bankers’ Association warned that leading lenders are poised to press “the relocate button” in early 2017.

Garnier stressed that no “hard and fast” plans had been made on what form of deal would be made. With negotiations due to begin before the end of March, pressure has been mounting for the government to be clearer in providing clarity, particularly to banks, to avoid a possible exodus of business from the City of London.

The government’s stock response has been that it does not intend to provide a running commentary on its thinking though there has been a charm offensive to improve communication and reassure the finance world that its interests won’t be ignored.

An explainer about why Brexit could trigger an exodus of banks from London.

Garnier elaborated on why the system known as equivalence, whereby London-based banks could keep operating in the single market if British and EU financial rules are compatible “wouldn’t necessarily work.” Many international banks, he said, would regard this equivalence with suspicion because the status can be withdrawn at 30-days notice.

“It is entirely possible that we will just have to adopt the rules of the EU as they come down with regards to financial regulation,” he said. A new arrangement along these lines would depend, he added, on creating “the right dialogue” to craft a system that works for both the U.K. and the EU.

Inflation Woes

Apart from preserving London as a financial hub, another consideration for the government is the pound’s slump since the Brexit vote. While ministers have argued it is a boost for exporters, others have highlighted the impact it could have on consumers at home by driving up prices. Garnier agrees that inflation is “just inevitable.”

A row broke out earlier this month when Tesco, the country’s largest supermarket, halted online sales of Marmite, after the maker of the savory spread, Unilever, said they wanted to increase the price due to the fall in the value of sterling.

“We have had Marmageddon,” Garnier said. “Consumers are going to start to see rising prices and there’s nothing we can do about that. That was a well-predicted effect of Brexit. The point was very clearly made by everybody: Brexit could easily result in a slump in the value of sterling. That has transpired.”

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Published at Wed, 26 Oct 2016 20:03:45 +0000

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