Brexit: financial services Contents

Chapter 5: The way forward

A bespoke arrangement?

89.Many of our witnesses, and the Government itself, have referred to the need for a ‘bespoke’ deal for the UK. This section addresses some of the key features of a bespoke deal, insofar as it could affect financial services.

90.It is clear that full membership of the EEA, providing full access to the single market, would be least disruptive to the financial services sector. If this is not on the table, it is equally clear, from the evidence we have heard, that a deal to bolster the existing equivalence provisions should be a high priority. George Hay told us that “the success of the negotiation will be whether we get a workable, bespoke equivalence regime. If we can get that, we will have succeeded.”102 Miles Celic argued for a “bespoke equivalence regime as part of a broader bespoke agreement”,103 while Anthony Browne supported “some version of the passporting regime that we have—in the sense that, bilaterally, banks based in the UK can serve customers in Europe and vice versa—as well as some influence over future rule-making, and some predictability”.104

91.Stefan Hoffmann, drawing on Swiss experience, said:

“All the equivalence rules will probably be applicable, but probably that will not be enough for a bespoke arrangement. You could try to arrange a sort of EU equivalence and, on top of that, at least part of EU passporting … I think it would be feasible to negotiate at least partially the passport rights that are in place at the moment, because there are certain passport rights that are applicable to third countries in the EU.”105

92.Huw Evans also advocated a bespoke agreement. He argued that the current regimes did not guarantee market access, were based on political decisions, were temporary and did not respond to a changing regulatory environment. The last point was particularly relevant to the insurance and longterm savings industry, in light of the forthcoming review of Solvency II in 2018.106

93.Sir Jon Cunliffe provided an overview of the factors that would determine the success or failure of any bespoke deal:

“A bespoke arrangement is about understanding how those permissions are used and which parts of the financial services industry use them most … It would have to work out how they are used, where they are used and which are the most important, and what the alternatives are … Some of the alternatives involve doing things in a different way through different legally incorporated entities registered in the European Union. What are the extra costs of that? If you do the business that way—business used to be done that way, so we can go back—what is the extra cost and who pays that cost?”107

94.The Minister, Simon Kirby MP, also acknowledged the complexity of the problem: “by its very nature it is very difficult to try to predict what the effect will be, because it is a moving target”. Katherine Braddick, of HM Treasury, agreed that it was hard to model a bespoke arrangement: “firms themselves are in a dynamic environment in terms of their profit and business models. They already have plans for location and structure. Distinguishing effects to do with altering our relationship with Europe from planning that firms were doing in any case is quite difficult, both in real time and to forecast.”108

95.A main purpose of any bespoke agreement, so far as financial services is concerned, will be to supplement the current equivalence regimes to mitigate any loss of access, and to ensure the continuation of equivalence decisions in order to maintain that access. The Government has acknowledged the complexity of predicting the impact of a bespoke deal. Nonetheless, we urge the Government, as a priority, to model the effect of different scenarios as accurately as is possible in order to achieve the most appropriate bespoke deal.

Planning and transition

96.Any significant change to business conditions is likely to cause disruption, and businesses will need to adapt to those new circumstances. Our witnesses were consistent in warning against the impact of a ‘cliff edge’, where the UK’s relationship with the EU changed suddenly, for instance at the end of the Article 50 negotiations. They called for a suitable transition period, to allow sufficient time to plan and adapt. In the absence of certainty over the impact of Brexit, financial services firms are considering their business models in order to minimise disruption.

97.Douglas Flint told us that firms would need to decide how to configure themselves once the UK had left the EU in two or more years. They needed two pieces of information: “where are the Government aiming to get to in their fresh relationship with Europe and what is the bridge arrangement between leaving and getting to that arrangement—how long will it be and what will it encompass?” He described the process of moving large numbers of people to another country, setting up arrangements and getting licensed as a “non-trivial task”.109

98.Peter Snowdon told us that many banks were waiting to see what happened, but that “the bigger ones may not have that luxury because the consequences of it not going in a way that suits them would result in an awful lot of work for them in restructuring their businesses”. Anecdotally, he had heard that some of them were already thinking about restructuring.110 Anthony Browne, Chief Executive of the British Bankers’ Association, told us that, if banks ended up needing to move operations, it could take “two, three or more years” to plan.111

99.Miles Celic said that “companies are going through scenario planning; they are making their plans at the moment. I have no sense that companies are saying that they will relocate.”112 This echoed the evidence of Sir Charles Bean, who said that “until you know exactly what the model is, it is a bit precipitate to take hard decisions to start moving”. But Sir Charles added: “The more that you think that there will be a transition period after the actual implementation of Brexit, the less need you will have to move now.”113

Transitional arrangements

100.The experience of EU trade negotiations suggests that it may not be possible to reach a bespoke agreement within the two-year period allowed for withdrawal negotiations under Article 50 TEU. Witnesses therefore consistently argued for a transitional period, to bridge the gap between withdrawal and conclusion of a comprehensive agreement. Professor Ferran supported “replicating as far as possible the current arrangements that we have with the EU, partly through equivalence, partly through bespoke provisions in the exit terms, and doing that as soon as possible so that we can avoid that cliff edge and businesses can start to plan.” It was important to agree at an early stage on both equivalence and on issues of legal certainty, for instance in settlement finality, as quickly as possible.114

101.Simon Gleeson told us that it would take two years to move a significant part of the business of an investment bank—the same as the entire length of the Article 50 negotiations. Ideally, he said, the industry would be able to restructure itself in the knowledge of the final agreement made between the EU and the UK, and he therefore advocated a two-year transition period once the terms of that deal were agreed. He suggested that the Government and the European Commission issue a joint declaration that such a transitional period would be put in place. In the absence of such certainty “a rational bank should start moving its business on the day that the Article 50 notice is signed”.115

102.Alex Wilmot-Sitwell agreed that the two-year Article 50 period was not enough to allow the industry to plan effectively, and a two to three year transition would be necessary. He described the transition as a bridge:

“If that bridge is not long enough or, indeed, if it is not even built in time, it is impossible to make that journey without incurring huge risks and harm to the participants. That does not mean us; it means the markets and our clients. These are very complex processes. Migrating huge businesses from one jurisdiction to another requires an enormous amount of work. It requires a huge amount of regulatory approvals; it requires an enormous amount of co-ordination with other participants, clients, counterparties and clearing houses. That process is very dangerous; it is fraught with risks. The materials that are being moved are risky. You do not move nuclear waste in a race; you do it in a carefully co-ordinated and managed process.”116

103.Elizabeth Corley also spoke of a bridge, involving many spans: from now until Article 50 is triggered, the negotiation period, and then the transitional period leading to the end state. The first challenge would be to ensure “continuity of service and continuity of risk management and controls”; the second would involve “passporting, future business growth and growing from the status quo”.117 Miles Celic noted that it was difficult to start building any bridge without knowing “what the bank on the other side is like: is it firm ground, soft ground, how far is it and how fast is the river moving?”118

104.Sir Jon Cunliffe commented that “political uncertainty is the most difficult thing for markets to calibrate”. Transitional arrangements for trade deals normally came at the end of the process, but Sir Jon noted that normal trade deals were about increasing rather than decreasing market access. In the case of Brexit, he thought that it was “possible that [firms] will need more advance warning of what is going to happen, or what will happen in the transition, than when you are increasing trade access”. There were different political ways in which this could be done, but the Bank’s interest was in ensuring “a smooth and orderly progression from where we are to where we are going, wherever that is. That is to do with ensuring that firms are able to plan and to execute those plans.”119

105.The Minister agreed that it was “important that we make sure that there is as smooth a journey ahead as possible and as little disruption as we can manage”. At the same time, he argued that “businesses make money by analysing the risks, preparing contingency plans and making the best possible decision for their shareholders or owners. I do not think in any environment you can ever remove uncertainty.”120

106.In our report on The process of withdrawing from the European Union,121 we noted that two agreements between the UK and the EU will be necessary: one on the terms of withdrawal and another on the UK’s future relationship with the EU. We considered it likely that these would be negotiated in parallel. Article 50(2) TEU requires the withdrawal agreement to take “account of the framework” of the withdrawing Member State’s “future relationship with the Union”, but the details of the future relationship might, at that point, remain uncertain. There are therefore at least two points at which a ‘cliff edge’ might make itself felt: the point of UK withdrawal following the Article 50 negotiations, and the point at which the future relationship came into effect.

107.Negotiations on the UK’s new relationship with the EU are likely to take longer than the withdrawal negotiations under Article 50. A transitional period will therefore be needed in relation to financial services following the completion of the Article 50 process, when the UK leaves the EU. This may need to be adapted and extended in the light of subsequent negotiations on a new long-term relationship with the EU. This will enable firms and others such as regulators to adapt to any new business conditions.

108.It will be vital, in the interests of all parties, to provide certainty as early as possible in the process. Negotiations on financial services should commence as early as possible after notification under Article 50 and the Government should pursue an early announcement on a transitional period. This period should extend through the negotiations on the new relationship and continue thereafter for a period sufficient to provide stability after that relationship is agreed. The more the new relationship departs from the status quo the longer any further transitional period may need to be.

109.We are concerned that, in the absence of clarity over the future relationship, firms may pre-empt uncertainty by relocating or restructuring, for instance by establishing subsidiaries or transferring staff, even though such changes may ultimately prove to be unnecessary. This would not be in the interests of the industry or the UK.

110.An orderly transition to a new relationship, whatever it may be, would ensure continuity of service to clients and the wider economy and would provide time for regulators and supervisors to adapt to changes in business practices adopted by firms. Avoiding a cliff-edge when the UK leaves the EU will benefit financial stability, and should be in the interests of the EU as well as the UK

The role of the Government

111.We noted in Chapter 3 that modelling the impact of Brexit would be difficult, given the range of business activities involved, the complexity of EU legislation underpinning those activities, and the range of scenarios for a future relationship. It will be a considerable undertaking for the Government to arrive at a robust analysis to support its negotiating strategy.

112.The Minister emphasised that “There have been extensive consultations not only at Treasury level but across government with interested stakeholders”. He also said that “We are very much in listening mode”. At the same time, he was hesitant when asked on which department would lead in negotiations on financial services. First he said that “It would be reasonable to suppose that the Treasury would lead on the negotiations for financial services, but the deal is there to be done”; then he said that “The Treasury is responsible for financial services, and you might suppose that it would have a very strong interest in the negotiations that directly affected that policy area”; before finally he confirmed that HM Treasury was leading and coordinating the financial services elements of the negotiation.122

113.In the interests of stakeholders across all sectors, the Government should provide clarity on the division of responsibility for the negotiations between departments. While the negotiating strategy must be agreed as a whole across Government, we are clear that HM Treasury is best placed to lead on financial services.

114.While Brexit is understandably the priority for the Government as a whole, we heard some evidence that it may be distracting the Treasury in particular from other matters. Giles Andrews mentioned a piece of mis-drafting in a peer-to-peer lending regulation, which he ascribed to “a lack of bandwidth” in the Treasury and the FCA: “We found, before Brexit, that considerable time and energy was put into working with our industry and we have noticed a fall-off in that, which is perhaps not surprising given the stretch in resources that is being taken up by activities such as this.”123

115.We were concerned to hear that Brexit might already be having an effect, through diversion of resources, on the quality of legislation produced by the Government. Brexit is rightly the Government’s top priority, but not to the exclusion of other important responsibilities.

EU reliance on UK financial services

116.The Oliver Wyman analysis, cited above at paragraph 4, suggests that £40–50 billion of UK financial services revenues relate to the EU. That analysis put the trade surplus for financial services for 2014 at £19 billion. These figures, while they underline the importance of EU markets to the industry, also demonstrate the extent to which the EU relies on the services provided by the UK.

117.Katherine Braddick admitted the Government’s statistics were scattered, but said it was clear that “banks based in the UK lend very material quantities into the real economy in European member states. It is also clear that the asset management industry in the UK manages very significant proportions of the funds of investors who are based in the EU.” She added that the compression effect of UK-based CCPs offered “a very cost-efficient and low-friction way for capital to move and trades to occur in Europe”.124

118.Douglas Flint said that EU businesses had consolidated their financial services requirements in the UK. Such an efficient service could not be replicated in one place, nor could the individual pieces be replicated “other than in a fragmented way over a long period of time”. Europe would want to ensure that the economy received the financial support it needed during a period of transition to a new model.125

119.Alex Wilmot-Sitwell touched on the difference, to which we have already referred, between political and economic interests across the EU: “corporate clients, institutional clients and other market participants want the most efficient access to products and services at the most effective cost. At the moment, having that hubbed substantially in one place, which happens to be London, is a great benefit to those clients and the users of such services. Clearly there is a potentially different political agenda.”126

120.Could a system as efficient as that in the UK be replicated elsewhere? Sir Jon Cunliffe was sceptical, at least in the short term:

“It is pretty unlikely that what we call London … will be replicated in the foreseeable future in one place in the European Union. It takes an awful lot of time and human capital. It is based around the interaction of financial services and other services. A great deal of the business is not to do with the European Union; in fact, only a minority of the business is to do with the European Union. The idea that this ecosystem is transplanted somewhere else into Europe in the foreseeable future is highly unlikely to me; over time, I do not know.”127

121.The Minister related London’s status to a wider point about financial stability: “There are places across Europe that perhaps do not have an immediate benefit from London and the UK, but are very focused on our not having financial instability because it would be absolutely the last thing they would want.”128 Lowri Khan developed a similar point: “German motor manufacturers have very large finance companies attached to them, so these issues will inevitably come together. Industry does not segment itself neatly into the buckets that policy necessarily does.”129

122.This underlies the interdependency between the financial sector and the wider economy. As Douglas Flint said of the motor industry: “You do not sell a bit of metal; you sell a financial contract which is secured by cars.” He believed that European manufacturers would continue to require access to UK financial services. This represented “a huge mutuality of interest in preserving access to finance to make the underlying business work”.130

123.The UK currently has a significant trade surplus in financial services with the EU, and it is to be expected that EU governments may wish to attract some of that business to their own territories. The efficiencies provided by the UK financial services industry, the reliance of EU firms on the services it provides, and the interdependencies between financial services and other EU businesses, mean that such efforts could be as harmful to the wider EU economy as to the UK economy. The Government should go into the negotiations armed with robust analysis of the economic impact on the EU of an attempt to dismantle and relocate UK financial services.


121 European Union Select Committee, The process of withdrawing from the European Union (11th Report, Session 2015–16, HL Paper 138)

124 Q 60. See also footnote 73 for an explanation of compression services.

129 Ibid.




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