Although the UK will likely lose its ability to clear euro-denominated transactions when it exits the EU, the economic benefits will probably not be passed to Europe, according to a report from the House of Lords EU Financial Affairs Sub-Committee.
The report, Brexit: financial services, considered what leaving the EU could mean for financial institutions and service providers.
It called London the world’s leading financial services centre, followed by New York, and suggested that other European cities are not at the same level.
A statement on the report said: “Any attempt to unpick London’s highly developed financial services ecosystem could result in much of the business lost by the UK relocating to New York or other financial centres outside the EU, rather than the EU.”
There is a concern that the UK is likely to lose the ability to clear euro-denominated transactions if and when it leaves the EU. However, the report suggested that, in fact, relocating clearing services to the eurozone will not bring the same benefits to the EU that clearing in the UK provides at the moment.
Relocating clearing to somewhere like New York would provided more like-for-like benefits, however clearing there would not allow the EU to benefit from repatriation of business.
Baroness Falkner, chair of the EU Financial Affairs Sub-Committee, said: “The EU should also carefully consider the findings of this report. EU firms rely on the services provided in the UK, and pain caused to the UK’s financial sector will not be the EU’s gain, but New York’s. We are in danger of a lose-lose scenario if pragmatism does not prevail.”
The report went on to say that some firms do not appear to be aware of their own reliance on the current passporting arrangements. It stressed that it would be in the interest of these firms, and in the national interest, for them to work with the government and regulators to determine the actual extent of this reliance.
Falkner said: “[The government] should go into negotiations with the strongest possible evidence base. It needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute.”
“We found those provisions to be patchy, unreliable and vulnerable to political influence: the government should seek to bolster them wherever possible.”
The report also noted that the UK’s financial sector employs approximately 1.1 million people, many of whom are not EU nationals.
Accessing high-quality staff and transferring them between the UK and the EU is an ongoing issue for the financial services industry, particularly in the financial technology sector, which, according to the report, relies heavily on sourcing talent from overseas.
Finally, the report highlighted the importance of an agreed ‘transitional period’, both when the UK issues Article 50, and as the UK negotiates relationships with the EU.
Falkner said: “The government has a lot of work to do. First of all, it must, early in the negotiation process, agree a transitional period so as to prevent UK based financial services firms from restructuring or relocating on the basis of a ‘worst-case’ scenario.”
The report is the fourth of six reports from the House of Lords European Union Committee on the potential impact of Brexit in various different areas.
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