For years, Britain battled Brussels to protect the City of London financial disrict from heavy European Union regulation.
After voting to leave the EU, Europe’s biggest financial centre is now free to do as it choses, but the cost is high: it faces losing access to the world’s biggest trading bloc unless it continues to apply EU rules.
Britain’s markets watchdog, the Financial Conduct Authority, told financial firms on Friday to continue preparing for EU rules that have yet to be finalised in a sign that Brussels will still loom large over the City for years to come.
The City of London’s policy chief Mark Boleat dismissed talk that a “bonfire” of EU rules was on the cards.
“There is little enthusiasm in the City to have a bonfire of regulation. Financial regulation is not going to change,” Boleat told Reuters.
The focus should be on the government negotiating continued access to the bloc’s single market, without which banks would be forced to shift operations to the euro zone, Boleat said.
Banks authorised in Britain have an EU “passport” to operate across the single market, but it could be two years or more before they know if they will continue to have a passport under the new trading terms that will be negotiated.
“In terms of job losses, it’s access to the single market that is vital. If there is no access secured, there will be job losses,” Boleat told Reuters.
“For some institutions, building up another base in Europe is crucial and they might need to do something now. Certainly by the autumn we will see decisions being taken,” Boleat said.
Britain will have to negotiate trade terms for many industrial sectors and not just finance, meaning there could be horse-trading for months if not years, lawyers said.
Even within finance, UK lenders, foreign banks, markets and asset managers will have different priorities, said Etay Katz, a financial lawyer at Allen & Overy.
FREE MOVEMENT NON-NEGOTIABLE?
Backers of Brexit have promised curbs on immigration but respecting the freedom of EU citizens to come to Britain may be hard to avoid even when the country is outside the bloc.
“There won’t be freedom for capital movement for the City without the freedom for people to move inside the common market.
Perhaps it will take some time for everyone in the UK to understand this,” said Sven Giegold, a German Green Party member of the European Parliament.
Britain will also have to show that its financial rules are “equivalent” to those in the EU to have access to its market, effectively copying and pasting the bloc’s rules into national law, like Switzerland and Norway does.
“The more access to the internal market the UK wants, the more they will need to follow the rules decided by others,” added Gunnar Hoekmark, a centre-right Swedish member of the European Parliament.
He is worried that with the exit of Britain, a liberal market economy, financial rules in the EU will become less market friendly, and Britain would still be forced to apply them.
The regulatory landscape will also evolve after Brexit.
The bloc’s banking regulator, the European Banking Authority, will have to leave its London base, with Frankfurt, home to the European Central Bank, the probable destination, making it an even more powerful influence on EU rules.
“London will remain a strong centre but the doors in Frankfurt are open and Frankfurt will gain through this vote,” Giegold said.
The ECB is keen for the huge swathes of euro-denominated securities clearing in London to shift to the euro zone.
“One of the most concrete things is that euro clearing will not take place in London,” Hoekmark said.
Brexit fallout is also likely to see the bloc’s financial services commissioner, Jonathan Hill, step aside given that he is British.
“It’s very hard for him to take a central role in driving policy,” said Damian Carolan, a financial lawyer at Allen & Overy.
Hill’s core project is to set up a capital markets union to raise more funds from markets, but given that Britain, the EU’s main financial market is now leaving the bloc, the CMU may suffer a setback, lawyers said.