Global banks with a key presence in London could trigger their Brexit contingency plans, such as moving jobs and operations overseas, if Britain doesn’t confirm that the nation will have a transition deal, by Christmas.
That warning comes from the Bank of England’s deputy governor Sam Woods when he made a speech at Mansion House in Britain’s capital last night (Oct. 4).
“If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Contingency planning is a sliding scale of increased commitment, investment and momentum through time. It is much more prudent and prosaic than hovering over the relocate button or rushing to the exit door,” he said
A transition deal is meant to be a period of time where the UK can gradually implement new laws and processes in light of Brexit, therefore preventing a cliff-edge moment of change. Woods added that the European Union’s position “is not yet clear” on a transition deal and this is causing great uncertainty for financial institutions in the UK.
Britain is going to leave the EU on March 29, 2019. Prime minister Theresa May is pushing for a “hard Brexit,” which means the UK would leave the EU without access to the Single Market, so it is able to get out of various conditions imposed on EU members, such as freedom of movement of EU citizens. However, this is bad news for the financial world.
The services sector makes up around 80% of the UK economy and financial services is a huge part of that. Not only does the finance sector account for at least 2.2 million jobs, each employee within that industry contributes more to the economy than the average worker.
On top of that, global banks use London as a financial hub due to its membership within the EU, therefore allowing it to provide key services to EU citizens, such as the processing of euro-denominated derivatives contracts by clearing houses. This business clears 18 major currencies and is worth around €930 billion ($1.1 trillion) per day.
Dozens of banks and businesses have been vocal about how they are looking to relocate or expand operations in Europe and US, to counteract a “hard Brexit.” They naturally have contingency plans they are ready to enact if it looks like Britain doesn’t get a deal that is similar to what the UK has now as an EU member.
The prognosis doesn’t look good though. Last month, prime minister May proposed a two-year transition deal. However, as Quartz reported before, “it doesn’t matter what May says publicly or what’s in government position papers, since these are mostly just wish lists of what Britain wants after Brexit.”
Under conditions the EU set out for talks, negotiations will not progress until Britain and Brussels come to an agreement over three issues, as stipulated by the EU: the Irish border, EU citizens rights, and the divorce bill.
Woods said in his speech that while we won’t suddenly see an instant, major shift in jobs, the first phase of banks’ contingency plans would likely lead to a re-structuring that “will in general increase their complexity.”