19 Jul 2016

The Brexit vote has happened and the argument is that increased autonomy will permit Britain to be more flexible in its regulatory approach, allowing banks an international competitive edge. 

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

Only time will tell which approach will be adopted and whether exiting was the correct decision. However, banks and the markets are concerned - there is no precedent to follow here. Therefore it is unclear how Britain will have access to its largest customer (the EU) and what the legal, trading and regulatory implications will be. The consequences for banks are therefore equally unclear.

The genuine fear is that exiting the EU will 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 will no longer apply in the same form. This leaves two choices:

  1. Banks with headquarters in Britain set up new EU-based headquarters; or 
  2. To ensure continued competitiveness as a financial hub, Britain will have to negotiate a bespoke form of exit to ensure a form of 'Passporting' continues. Every EU member state would need to approve this. 

The terms of any bespoke arrangement cannot be accurately predicted and the timetable for such negotiations would not be under Britain's sole control. However, two things are clear:

  1. The uncertainty of Britain's post-Brexit transitional period (between the referendum and finalising the terms of our exit) could have a material adverse effect on the business, financial condition, credit ratings and operations of banks in Britain; and
  2. There is a real risk that bank headquarters will leave Britain to continue their pan-European strategies.