Britain’s financial industry on edge as referendum result nears

By: | Published: June 24, 2016 3:04 AM

Traders are at their desks for the night, corporate lawyers are staffing a "rapid response" centre and the Bank of England is on high alert; Britain's financial sector is as ready as it can be for a referendum that may change the industry forever.

BrexitAn industry that employs 2.2 million people and earns the nation huge sums is divided over Thursday’s vote, in which Britons have been deciding whether their country should remain in the European Union or leave. (Reuters)

Traders are at their desks for the night, corporate lawyers are staffing a “rapid response” centre and the Bank of England is on high alert; Britain’s financial sector is as ready as it can be for a referendum that may change the industry forever.

An industry that employs 2.2 million people and earns the nation huge sums is divided over Thursday’s vote, in which Britons have been deciding whether their country should remain in the European Union or leave.

Those who want Britain to stay believe a vote for “Brexit” will have consequences for London’s financial centre that overshadow sterling’s ejection from the forerunner of the euro in 1992 and even the onset of the global crisis in 2008.

“This is the biggest vote in my lifetime. Black Wednesday and the impact of Lehman Brothers collapsing – these other big events don’t even compare in magnitude to this,” said Mark Boleat, Chairman of the City of London’s Policy and Resources Committee.

“We are just beginning to think through what will have to happen legally and it is massive, absolutely massive,” he told Reuters.

Already some effects are being felt. During the bitterly fought referendum campaign, Britain’s share of global financial deal-making has fallen to its lowest level on record, the pound has fluctuated and Brexit worries have helped to push European financial stocks to near four-year lows.

Polls have indicated a tight outcome when official results are announced some time after 0600 GMT on Friday. As with the voters, opinions are divided in the financial services business.

Several investment fund firms and brokers have pitched for a leave vote, arguing that this promises greater prosperity by refocusing trading links towards the faster growing economies of Asia and the United States.

They want the unravelling of years of EU-designed regulation which they say has stifled the ingenuity and productivity of the British financial sector.

But investment banks, many foreign-owned, have donated money and engaged in unprecedented lobbying efforts to keep Britain in the EU. Many fear ties with the world’s biggest free market will be severed, costing thousands of jobs and inflicting untold damage to London’s status as the premier European banking and trading centre.

In Canary Wharf, one of London’s two main financial districts, electronic advertising boards have been carrying ads urging people to “Vote Remain”.

PASSPORTING ANXIETY

Many financial firms and insurers rely on the EU’s ‘passporting’ regime to sell their services across the bloc while basing most of their staff and operations outside the euro zone in London.

European government officials have warned that British-based firms could lose their ‘passports’ if the country opts to leave, a move that would force them to shift some operations to the likes of Frankfurt, Paris or Dublin if they wanted to continue serving EU clients.

Just as the polling stations closed, hundreds of bankers, traders, hedge fund investors and wealth managers anticipating wild swings on the markets returned for the overnight shift, a rarity since the height of the 2008 financial crisis.

Analysts at UBS predicted “mid-teen” percentage falls for UK and European equities in the event of a leave vote, while Dutch lender ING, French bank Societe Generale and Bank of America Merrill Lynch are among those which have warned clients that difficult trading circumstances are likely on results day.

The pan-European exchange operator Euronext also plans special measures in anticipation of higher volatility and trading volumes.

International law firm Clifford Chance said it is setting up the 24-hour rapid response centre at its London headquarters to support clients concerned about the outcome.

The Bank of England is on high alert to provide emergency support should financial markets buckle when the result emerges.

RISKY GAMBLE OR ROUTE TO RICHES?

Data from The CityUK showed Britain’s financial and professional services industry contributed 190 billion pounds ($280 billion) to the economy in 2014, roughly 12 percent of economic output.

The UK is the leading exporter of financial services across the world, generating a trade surplus of $97 billion in 2015, more than the combined surpluses of the next three leading countries, the United States, Switzerland and Luxembourg.

London is also home to Europe’s largest insurance sector and the world’s biggest community of foreign banks, there to take advantage of its pool of financial talent, legal and regulatory systems and free access to European capital markets.

The UK investment management industry, a magnet for international sovereign wealth and an historic safe haven for global investors, ran 6.8 trillion pounds of assets in 2014 – the second largest in the world, but is already suffering from declining sentiment.

While Brexiteers insist Britain’s financial industry should thrive once the EU shackles are shed, some of its biggest employers including JPMorgan, Citi and HSBC have warned that London jobs will be lost if they have to move euro trading to the continent.

A complicated divorce from the EU could also set back government plans to offload taxpayer stakes in Britain’s largest domestic lenders, Lloyds Banking Group and Royal Bank of Scotland, sources close to the matter said.

Any prolonged volatility in stocks, sterling and UK government bonds after a Brexit vote – as forecast by the International Monetary Fund, U.S. Federal Reserve and Bank of England – might benefit some opportunistic traders.

But the impact on Britain’s multi-trillion pound pensions industry, which relies on stable stock markets and economic growth, remains unclear.

Influential Brexit-backers including billionaire investment veteran Peter Hargreaves and economist Roger Bootle say quitting Europe would give Britain the best chance to stay ahead of rival financial centres if a global recession returned.

Others are less convinced.

“The attraction of the UK as a centre for financial services and business services tends to be encapsulated in the fact that we are English-speaking but not the U.S., and that we are European but not in the euro zone,” Peter Sands, ex-Chief Executive of Asia-focused lender Standard Chartered.

“That is fantastic positioning. It seems bonkers to me to give that up.” ($1 = 0.6801 pounds) (Additional reporting by Andrew MacAskill, Lawrence White, Simon Jessop, Carolyn Cohn, Anjuli Davies, Freya Berry, Huw Jones, Pamela Barbaglia, Sophie Sassard and Maiya Keidan; Editing by Rachel Armstrong and David Stamp)

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