Bylined Article by global head of the Derivatives & Structured Products practice, and head of the firm's Banking & Finance practice in London Ed Parker on city financial institutions and law firms being apprehensive about the UK triggering Article 50.

Following Theresa May firing off the Brexit negotiations starting gun yesterday, City financial institutions and law firms are apprehensive.

Brexit Secretary David Davis understated when he said that we have “the most important negotiation for this country for a generation” in front of us. “It’s all to play for” is more accurate. The “all” is London remaining the leading central financial global hub, with as limited as possible restriction on EU access through a mixture of passporting, equivalence recognition, and subsidiary or branch access.

Just this week, and in spite of the uncertainty, a global study confirmed London as the world’s leading financial centre. Although, Post-Brexit, London continuing its successful reign will be a test, the City has survived stiffer challenges from war, devaluations, loss of trading empires and routes; to previously stronger and periodic continental European competition. There will be wounds but the City will heal.

In two years, the UK’s financial services sector will become a ‘third country’ under EU financial services legislation. The best outcome for the City is a withdrawal agreement which retains passporting rights. This could be either by the UK remaining a member of the European Economic Area, or, more likely, by negotiating a special arrangement.

However, if a political impasse precludes passporting rights, an expanded version of the EU’s Third County Regime (TCR) access provisions may be an alternative. TCR access is the existing EU rule set covering third country established firms. This provides rights of access below passporting for financial services firms established outside the EU (where London will be).

This process does though rely on other European states deeming the UK’s regulatory and legal systems as being on par with their own, and will require a broadening of existing provisions to capture all relevant financial sectors.

Two further alternatives for UK firms, each with drawbacks, may also be available: establishing an EU branch or a subsidiary. Branch access is not available in all areas of financial services and depending on the number of jurisdictions where a firm does business, establishing multiple branches can be costly.

For an EU subsidiary, although existing EU passporting rights could be viable, transferring all or some of the existing UK business to the EU subsidiary may be expensive. This could be simpler if the negotiated withdrawal agreement allows operational functions, or a substantial part of them to remain in the UK, on a brass plaque basis.

A number of companies, including Goldman Sachs, AIG and Morgan Stanley have announced plans to start moving some jobs across to other jurisdictions – Dublin, Frankfurt and Luxembourg are early beneficiaries. One swallow does not a European summer or British winter make. The UK financial and legal services industries must focus on their crucial role remaining in the leading global hub, and their ability to overcome previous adversity.

With two years of uncertainty ahead, and no real impact before the negotiations are completed or the course clear, our businesses should embellish the traditional British characteristic of ‘keep calm, and carry on’.

This article was first published in The Times on 30 March 2017