Global banks, already accelerating plans to pull back from London as Brexit looms, are increasingly concerned that Prime Minister Theresa May is underestimating the time they’ll need to adjust to the upcoming changes in trade and regulations.
Despite the prime minister’s promise to seek a transitional phase, financial professionals expressed disappointment after Brexit Secretary David Davis estimated that the period would amount to one to two years.
Lenders are saying the government needs to ensure that they have time to adapt amid signs that the process will move quickly. Although the premier used terms like a “phased process of implementation” to avoid a “cliff edge,” Brexit Secretary David Davis estimated that the period would amount to one to two years.
On top of the two years the government will use to negotiate its break from the EU, the industry will need at least three more years of access to the EU in its current form to adapt to what comes next, one bank executive said. An industry lobbyist suggested it might need as long as five years.
The U.K. leader indicated this week that she’ll pull Britain out of the European Union’s single market, prompting banks including JPMorgan Chase & Co. and HSBC Holdings Plc to begin detailing their strategies to shift thousands of jobs out of the country to ensure continued access to the bloc.
“Talking about transitions and phase-ins will be important,” Barclays Plc Chief Executive Officer Jes Staley told Bloomberg Television on Thursday from the World Economic Forum in Davos, Switzerland.
A lack of clarity on the government’s part could force banks to assume the worst and begin enacting their contingency plans early and perhaps switch over more activities than they might do with more insight. Bankers are also concerned that discussions between the U.K. and EU on a transitional phase will come late in the divorce process.
The finance industry needs time to make adjustments including finding offices abroad, shifting capital, moving or hiring staff, seeking regulator approvals in new locations and ensuring existing financial contracts remain legal.
By talking of an “implementation” period, the government may just be aiming for enough time for firms to make technical legal changes rather than overhaul their businesses, Bank of America Merrill Lynch economist Robert Wood told clients in a report this week.
Politics is also in play. A lengthy adjustment period could be seen as foot-dragging by those who campaigned for Brexit and could hurt May if she ends up fighting for re-election in 2020 with deep ties to the EU still intact. Davis told the BBC on Wednesday that any interim arrangement “won’t be a long time” and will be determined by the terms of the final deal.
“Markets seem to interpret ‘transition’ as effectively maintaining the U.K. in the EU perhaps until the mid-2020s,” Wood said. “That is, in our view, unlikely.”
If the U.K. leaves the single market it would take away banks’ ability to sell wares across the EU from bases in London, forcing them to open operations on the continent. Frankfurt, Madrid, Dublin and Paris are among the cities in their sights. Lloyd’s of London, the insurance market, is pushing ahead with plans to open European headquarters outside of Britain and will decide where to go in the first quarter, Chief Executive Officer Inga Beale said in an interview on Friday.
Morgan Stanley may move as many as 1,000 jobs in sales and trading, risk management, legal and compliance, as well as back-office positions, Reuters reported Friday, citing an unidentified source. Citigroup Inc. could move about 100 positions, according to the report.
“We continue to evaluate what changes we may need to make to our business, and no decisions have yet been made in this regard,” Mark Lake, a Morgan Stanley spokesman, said in an e-mailed statement. Citigroup’s Danielle Romero-Apsilos declined to comment.
May said in a Bloomberg Television interview on Thursday in Davos that she wanted “to ensure that we can keep financial services in the City of London. I believe that we will do just that.”
While bankers hope May can match her words with action, previous EU trade accords with countries outside of the block have tended to allow only piecemeal access to the continent’s markets for finance.
Chancellor of the Exchequer Philip Hammond argues Britain should be a special case, saying companies and consumers throughout the EU benefit from the U.K. financial industry’s might and therefore have an interest in safeguarding it.
“Any diminution of London’s financial system would be bad” for the EU and U.K., he said in Davos.
EU leaders may not be persuaded, as cities on the continent look for ways to lure jobs from London. German Finance Minister Wolfgang Schaeuble warned in Davos that any negotiations for banks to be able to penetrate the EU from the U.K. will be “very difficult” and would take “a lot of time.”