BRUSSELS: Britain’s partners are stepping up warnings that if it votes next week to leave the European Union, banks and financial firms based in London could lose their money-spinning EU “passports.” The City of London vies with New York as the world’s biggest financial center in part thanks to the automatic right to sell services across the 28-nation bloc with low costs and a single set of rules under a system known as passporting, industry and European officials said.
Asked by Reuters what would happen in case of a Brexit, French Finance Minister Michel Sapin said: “There will be no passport, or that would have to be negotiated against a lot of reciprocal concessions.”
Sapin said aloud what many EU officials and diplomats are saying privately. Unfettered access is widely seen as the “crown jewels” of British membership benefits, and London’s partners would charge a high price for keeping it, if they were willing to do so at all. Germany, France, Luxembourg and Ireland would all be vying to take business from London in areas such as investment banking, clearing and settlement and fund management. EU membership gives Britain access to what effectively is a “financial Schengen zone” – a single set of rules that allows banks, including many U.S. and other non-European institutions, to operate freely across the bloc’s borders.
Just as the 26-nation Schengen area, which Britain has never joined, permits citizens to travel without border formalities, the single market allows lenders, fund managers and investment firms to operate EU-wide without different national rules and controls. Britain is the biggest beneficiary as U.K.-based banks and investment firms play a key role in European financial markets for derivatives, foreign exchange, cross-border bank lending, asset management and insurance services. A passporting system allows U.K.-regulated banks to open branches in EU countries simply with a notice to the British supervisory authorities.
Financial services account for 8 percent of British national income, according to the Bank of England. The sector accounts for almost a quarter of all EU financial services income and 40 percent of EU financial services exports. Eighty of 358 banks operating in Britain are headquartered elsewhere in Europe.
“A key concern of many U.K. banks and investment firms is that the exit of the U.K. from the EU would mean that they would no longer benefit from the passport and would be subject to similar restrictions as non-EU firms,” banking lobby AFME’s report said, with doubts about London’s future as a hub for continental financial services.
The impact would be as severe on American, Japanese and other non-European banks that have their European base in London. Many are already considering giving up parts of their business in Europe, or moving them to inside the euro zone, in the event of a Brexit.
Banks would still be able to set up subsidiaries, as opposed to branches, in European countries where they seek to operate, but a banking official said “this implies bigger commitments and higher costs.” Subsidiaries have to be capitalized separately and are subject to national regulation and potentially to national ring-fencing of liquidity.
The EU treaty provides for two years to negotiate a divorce once a country decides to leave. That period could only be extended by unanimous agreement.