The Political Drama Across the Pond
We take a brief respite this week from analyzing the rancor of U.S. politics and turn our attention across the pond. While the UK has been spared from the political wrangling we’ve experienced here in the States regarding the Mueller report, the Brits have been living with their own years-long political crisis.
Earlier this week, members of the UK parliament voted 329 to 302 to continue the Brexit drama, which began more than three years ago when former British Prime Minister David Cameron announced in February 2016 his intention to hold a public referendum on whether the UK should leave or remain in the European Union (EU). That June, nearly 52% of UK voters cast their ballots in favor of “leave,” triggering a series of events that was supposed to see the UK exit Europe at the end of this week.
Amidst a chaotic intervening three years in which UK policymakers have struggled to decide how, exactly, they will leave Europe, a temporary extension was granted. The UK was given by EU leaders an additional two weeks to remain in the Union – until April 12 – which can be extended to May 22 if the British Parliament adopts a withdrawal agreement.
Under a plan adopted Monday, March 25, British parliamentarians will get to vote on alternative options to Prime Minister Theresa May's Brexit deal, including a plan that would revoke Brexit and another “no-deal” option that would see Britain leave the EU in April without any formal agreement. (At last count, Theresa May still needed to convince at least 70 MPs to secure enough support for her plan to pass.)
Votes on the alternative options – the details of which are still emerging – will happen Wednesday.
While there’s no word on who will play Prime Minister Theresa May on Saturday Night Live, a no-deal vote could significantly impact the financial services and fintech sectors. How so? Opinions vary, and Catherine McGuinness, who leads the municipal body that helps to run London’s financial district, told the Insurance Journal that it is possible we “won’t know what the full impact will look like for at least 10 years.”
One of the primary concerns about the UK crashing out of the EU is the effect it will have on jobs and investment in Britain. As Forbes Europe contributor Joe Wallen noted, “London has long been considered the European – even global – capital for fintech, with firms attracting over $5.08 billion of investment since June 2016.” Investment in fintech in France was about a quarter of that and, in Germany – a country with an economy more than 40% larger than the UK’s – it was just one-fifth.
Over the last several months, worries about shifting investment and operations has diminished somewhat, depending on who you ask.
In the wake of the June 2016 popular vote, Chase announced that it would move operations out of the UK Dozens, and possibly hundreds, of companies were expected to follow, but according to a Reuters survey, that sentiment has leveled off, and even declined. In a survey in September 2017, UK-based financial institutions estimated they would shift about 10,000 jobs overseas. By September 2018 that figure had fallen to nearly 5,800 and in Reuters’ most recent poll it was around 2,000.
An analysis in this morning’s Washington Post was less sanguine. It reported that five of the largest banks in the UK will move $847 billion in balance-sheet assets to Germany and noted that, while initial estimates that 20,000 jobs will shift overseas were “too high … some large banks are still moving several hundred positions.” Others are taking a “wait-and-see approach before moving more staff.”
Not Bank of America. In February, bank officials insisted the company would spend $400 million “on everything from offices to moving people and technology as it tries to ensure clients can trade seamlessly with the EU after the UK’s exit.” This week individuals close to JPMorgan Chase & Co. said the firm will push “300 London-based investment banking staff to sign fresh contracts confirming they’ll leave the UK in the event of a no-deal Brexit.”
Even if firms don’t move, it doesn’t mean all is well.
According to a survey of fintech business leaders, including some in California’s Bay Area, more than half would not consider setting up shop in Britain if it leaves the European Union. A quarter wouldn’t invest there. Last fall, Wired reported fintech firms are fleeing to Poland and Lithuania. Companies view these venues as rich in talent. (As The FinTech Times has explained, a no-deal vote could mean firms based in the UK that stay could have a tougher time attracting engineers from the mainland.)
The Washington Post also explained how a crash-out will affect the ability to transfer data since, under EU rules, firms cannot send personal information outside non-EU countries. In a no-deal scenario, consumer data likely will not be permitted to transfer between the UK and any European Union member-state. Still, The Post noted, “Regulators have warned banks to check where the data they handle is stored and to take ‘mitigating actions’ if needed.”
Regarding trade, in a story published on Monday, Reuters explained World Trade Organization rules and tariffs would immediately take effect upon Brexit and apply to goods traded with Britain. Additionally, “British entities would no longer be eligible to receive EU grants or to participate in EU procurement procedures under current terms.”
In a series of reports issued on March 12, the British government tried to outline the practical implications of Brexit for a number of sectors, including financial services, and how the government and the EU are attempting to mitigate problems. The government explains that a no-deal agreement means firms based in the UK will lose access to the EU “passport,” which gives firms authorized in their home state the right to conduct business on the continent based on their home state authorizations. “The ability for firms to trade cross-border may therefore change as a result,” the government concedes. Under a no-deal Brexit, UK-regulated financial services firms will therefore be required to obtain direct approval from European member-state’s regulators to do business in Europe.
The FinTech Times explained what the passporting issue could mean for the sector: “The total loss of this passport would make doing business on the continent more expensive and administrative, as authorization would need to be obtained in each state. As a result, we could see some fintech companies upping sticks and moving their headquarters to an EU country or establishing an EU-based subsidiary.”
Britain also has put into place a Temporary Permissions Regime, which will allow firms to continue to conduct business in the UK for a limited period after Brexit while they seek approval to stay permanently, and a Financial Services Contracts Regime, which will allow other firms to wind down their UK operations in an orderly manner.
How – or even whether, really – the UK leaves Europe over the next few weeks is still anyone’s guess, even though it’s been more than 1,000 days since the Brexit referendum.
Which brings us to what is, perhaps, our favorite Brexit meme, “A cat’s advice on Brexit.” Asked his opinion on Brexit, a feline replies: “I think you should repeatedly ask to leave. Then when the door opens, you should just sit there and stare at it.”