The fight is on to attract business away from London. But what should banks be thinking about when deciding where to move?
Brexit brings many challenges. But one of the biggest potential risks or opportunities – depending on your viewpoint – concerns relocation of EU operations for international banks. London has long been the pre-eminent global centre for foreign banks and international finance. Whilst London will no doubt remain an important centre post-Brexit, it would seem (as things stand) that the cherished EU passport regime will not continue once the UK has left the EU. As such, many international banks will need to find a new EU headquarters if they are to continue servicing clients cross-border throughout the EU. Bank Boards will need to make such decisions in the coming months, given the time it will take for authorisations and regulatory permissions to be acquired. So what are the views of the key regulatory and supervisory actors at EU and national level? And what should Boards bear in mind when looking for a new home? Here are a few thoughts:
Firstly, EU level authorities are acutely aware of the risk of regulatory arbitrage, leading to a “race-to-the bottom” by national competent authorities keen to attract relocation business. To mitigate this and reiterate the importance of uniform supervision at EU level, the ECB has offered a sort of forward guidance regarding how it will process authorisations for which it is responsible, namely systemically important banks. The European Securities and Markets authority (ESMA) has also taken a tough line regarding supervisory convergence in a post-Brexit world. At political level, the European Commission and European Council are very conscious that whatever the Brexit deal, the UK cannot be in a position whereby it can retain all the benefits of EU membership without the costs. When it comes to financial services – the UK’s area of expertise – its position as a third country will have to be weaker than it is today, so see many EU leaders. London seems to understand this in terms of the withdrawal process. But quite how financial services will be handled in the context of a future UK/EU trade relationship remains to be seen. It’ll be a key future battleground.
At national level views differ somewhat. Germany has taken a tough line, reiterating its opposition to any form of regulatory competition in order to attract business from the City. This principled position is made easier given the natural attractiveness of Frankfurt due to the existing presence of the ECB, EIOPA, Bafin and the Bundesbank. France, Ireland, Luxembourg, Cyprus, Malta, amongst others have been more interested in trying to see some upside opportunity of Brexit. Each in its own way has been keen to outline their natural advantages as they fight to lure banks to their capitals. Some are highlighting their attractive tax regimes, whilst others are talking up the quality of life/services of their respective countries. Others still are outlining the stability of their regulatory/supervisory and legal systems. What seems clear is that there is no natural alternative to London, so a more decentralized system is likely to develop in the coming years. Some EU politicians see this as negative in terms of increased costs for business and end users due to fragmented liquidity; others see this as positive in terms of a more stable, multi-polar framework, fully within the EU’s legal system.
So what and where to choose? Existing geographical footprint and pre-existing supervisory relationships seem to be the key consideration for banks already operating within several EU member states. For larger banks operating EU cross-border, creating an EU subsidiary will allow continuation of full clients services across the EU27. But creating subsidiaries also requires such legal entities to respect EU prudential legislation on a standalone basis, including ring-fencing capital, liquidity and bail-inable debt to name just a few of the key EU prudential requirements. For smaller, more bespoke banks offering niche investment banking or wholesale market services, establishing a third country branch may be more attractive. This approach would avoid applying the full range of EU legislation but will allow limited cross-border activity within the EU.
In conclusion, like when buying a new home, there are many factors to consider when assessing where to establish a new presence within the EU. But location is clearly one of the most important ones. Ease of business (language/legal system); fiscal rules and taxation; proximity to clients, employment cost and law; quality of educational and health services; travel connections; real-estate availability and other cost all need to be borne in mind. Whatever the outcome of Brexit, it seems likely banks will have to carefully consider their options when it comes to ensuring continuation of service for clients. What makes one location attractive for one bank, might not suit another. What’s clear is that it is important to have all the information to hand in order to make an informed decision.