MPs warned of ‘Jenga’ effect of Brexit on financial services

The UK government should aim to negotiate a transition deal at the end of the scheduled two-year negotiations on Brexit, or risk losing thousands of financial services jobs as firms opt to move out of London in order to ensure they can still do business with the EU, MPs have been warned

The Treasury select committee inquiry on the UK's future economic relationship with EU heard evidence from Douglas Flint, group chairman of HSBC Holdings, who said ‘the ecosystem in London is like a Jenga tower’.

Flint said: ‘Uncertainty as to where we are going to end up would trigger people thinking earlier about moving jobs, to give themselves access to the passport, the right to do business in Europe.’

Xavier Rolet, chief executive of the London Stock Exchange Group (LSE), told the committee that if euro clearing operations moved out of the capital, there could be many thousands of job losses, two thirds of which would be felt outside Greater London. He highlighted a report from EY suggesting as many as 232,000 jobs would be at risk or likely to be lost across the UK as a whole.

Rolet said: ‘It’s not the level revenue or the number of jobs created by the underlying activity that counts. It is the onwards upstream and downstream strategic relevance of the business for the trading, syndication, distribution, risk management, IT, as well as treasury management of corporate insurers.’

He said the EU could take the ‘momentous decision’ to claim the euro clearing business via treaty or regulatory changes, or through the introduction of minor rules that have a far-reaching impact.

Flint indicated HSBC was already considering ‘pre-emptive action’  to address the risks, and was considering moving jobs to France, the Netherlands or Ireland before the Article 50 process is complete, but had not decided whether to ‘push the button’ on the project.

Flint said: ‘If you have already established an operation in the EU you can take your time to decide whether or not to move quickly more leisurely, seeing how the negotiations flow.’

All three witnesses at the session, who also included Elizabeth Corley, vice chair of Allianz Global Investors, said the UK government should ensure there are clearly agreed transition arrangements in place for what happens at the end of the two-year exit process.

Andrew Tyrie, chairman of the Treasury committee, said: ‘The unanimity among these leading City figures - about the need for a three-year “standstill” at the end of the Article 50 process - is significant.

‘They argued that without such an arrangement, major banks and other financial services firms will take pre-emptive action at a cost, perhaps large, to the sector and the wider economy.

‘They also made other important points. Preserving the access arrangements provided currently by passporting is an important objective. Accepting the loss of one part of the financial services industry, such as euro clearing, could have unintended and disruptive consequences, for the UK and the EU.’

A recent report from the research group Oxford Economics includes revised Brexit assumptions underpinning its baseline forecast following a series of comments from key government ministers. The consultancy continues to expect that Article 50 will be triggered this year but now assumes that the two-year period of exit negotiations is followed by transitional arrangement – likely to be similar to the status quo – lasting two to three years. This would provide breathing space to negotiate a free trade agreement (FTA).

However, the new research states: ‘But much could still go wrong. The government’s insistence that it can agree a FTA within the Article 50 period looks misguided and raises the concern that it will lose patience if progress proves slow. This means that the probability of the UK ultimately reverting to trading with the EU under WTO rules remains high.’

At the end of last year the Treasury committee issued a call for written submissions on transitional arrangements. At the time, Tyrie said: ‘Many firms are understandably concerned that in April 2019, the government's current timetable for leaving the EU, they will be faced with a sudden change in their operating environment.’

The deadline for any submissions is 31 January 2017. Details are here.

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