18 Apr 2016

Those who are pro-Brexit argue that increased autonomy would allow Britain to be more flexible in its regulatory approach; affording banks an international competitive advantage.

However, EU membership has seen Britain, more specifically London, become one of the largest financial markets in the world and the EU financial centre, often leading key reforms.

Banks and the markets are undoubtedly concerned about the real risk of a Brexit – there is no precedent to follow here. Therefore it is unclear how, post-Brexit, Britain would have access to its largest customer (the EU) and what the legal, trading and regulatory implications would be. The consequences for banks are therefore equally unclear.

The genuine fear is that exiting the EU would cut trading activity and make doing business with the EU (which currently takes almost half of Britain's exports) more expensive and time consuming.

The 'Passporting' rules that enable EU headquartered banks to carry out business in other member states would no longer apply in the same form. This leaves two choices:

  • firms with headquarters in Britain would need to set up a new EU headquarters; or
  • to ensure continued competitiveness as a financial hub, Britain would have to negotiate a bespoke form of exit to ensure a form of 'Passporting' continues, which every EU member state would need to approve.

The terms of any bespoke arrangement cannot be accurately predicted and it would not necessarily be a negotiation Britain would lead. However, two things are clear:

  • the uncertainty that would follow any transitional period between the referendum and finalising the terms of a Brexit could have a material adverse effect on the business, financial condition, credit ratings and operations of banks in Britain; and
  • there is a real risk that bank headquarters would leave Britain to continue their pan-European strategies.