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How the City could benefit from the election result

15 June 2017
The Times
Whilst the election result does not change the potential post-Brexit possibilities for the UK’s financial services sector, it does adjust outcome probabilities.

Taking a snapshot of the City’s preferred possibilities today for when the UK becomes a ‘third country’ under EU financial services legislation in 21 months, the finance industry hopes most of all for a withdrawal agreement retaining passporting rights – either by European Economic Area membership, or special arrangement. If passporting rights aren’t possible, Third County Regime (TCR) access provisions, utilising substantially enhanced existing EU rules for third country established financial firms, may be adequate.

The other palatable alternatives of post-Brexit access to EU markets are through EU domiciled branch or a subsidiary access, which allow a substantial UK footprint to remain.

Then there is the unpalatable alternative, where the Government concludes that no deal really is better than a bad deal, and a Hard Brexit follows; or the Government agrees a bad deal.

When the Article 50 notification was delivered, the two year negotiation deadline seemed impossible: an impossibility compounded by an insistence that the divorce bill be settled before access negotiations commence. An enhanced majority for Mrs May at the election would have given her greater flexibility negotiating a deal, which could have given a slim hope of completing negotiations by the deadline, forcing rapid adjustments for financial institutions.

So completing Brexit by March 2019, now really is impossible, and this may benefit the UK financial services sector. The EU is inflexible until it needs to be flexible. Iron deadlines for financial regulation are regularly set, for example agreements to require all standardised derivatives to be centrally cleared by the end of 2012 at the latest, are still being implemented some five years later. Lines in the sand repeatedly crossed in the Greek crisis are another example. Once the deadline is missed or extended, then further extensions will become inevitable, and full Brexit may take many years, making one of the more palatable options is more probable.

A week ago, “No deal is better than a bad deal”, was repeated ad nausea. Now the mood has changed, and with it attitudes to free movement of people. Perhaps free movement with a migration cap is now more likely, with one of the palatable alternatives agreed in return.

Pre-election, a number of large financial institutions had announced plans to start moving some jobs across to other jurisdictions – Dublin, Frankfurt and Luxembourg are early beneficiaries. That trend will continue, whilst negotiations take place, with competition to take the central spot. There is no real front-runner and most of the large players are instead increasing capacity in jurisdictions that they already have a subsidiary, as a hedge, rather than a long term move.

Paradoxically, the failure of the election strategy may make a Hard Brexit less likely, usher in a more realistic timetable, and cause less long term disruption and damage to the City. The City likes certainty, but it also appreciates time to adjust.

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