The City of London will be able to cope with the loss of banks passporting rights if Britain leaves the EU’s single market, according to an influential credit rating agency, assuaging fears that the UK’s financial services sector will be crippled by Brexit.
EU passports allow lenders and other financial companies to operate across the 28-nation bloc without having to secure approval for access to each country individually. Opponents of Brexit have argued that losing passporting rights would deal a heavy blow to London’s status as a global financial centre that gives banks around the world access to the EU.
However, in a boost to the City, analysts at Moody’s Investors Service have largely dismissed concerns that London would be unable to withstand the consequences of the UK leaving the single market, arguing the loss of passports would be “manageable” for most banks and financial services firms.
“The direct impact is likely to be modest,” the credit analysts said today. “The greater impact would be felt through higher costs and diversion of management attention, as the companies concerned restructure, reducing profitability for a time.
“This is credit negative but manageable. And other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se.”
Whether or not Britain remains in the single market and London’s role as a financial hub will be key battlegrounds in Brexit negotiations between the UK Government and the rest of the EU.
Jens Weidmann, who leads Germany’s central bank, warned in a newspaper interview last weekend that “passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area [EEA]”. That contrasts with the stance of Boris Johnson, the pro-Brexit foreign secretary, who has said he expects banks to retain their passports following Brexit.
While analysts at Moody’s agreed that leaving the EEA was likely to result in the forfeit of passports, they argued that the EU’s forthcoming Mifid 2 directive on financial services regulation, which comes into force in 2018, would make up for much of the loss. Under Mifid 2, the UK will have to adopt an equivalent regulatory regime to the EU, potentially giving firms an alternative access point to the single market.
“We consider that the equivalence provisions within Mifid 2, the complexity of quickly unwinding the status quo and the desire to minimise the initial impact on European-domiciled banks will lead to the preservation of most cross-border rights to undertake business,” the Moody’s analysts said.
They conceded, however, that the City will not emerge from Brexit completely unscathed, as some jobs may be moved out of London to Europe.
“It is likely that some banks and other financial services companies may choose to move some UK-based activities to the EU before the UK’s withdrawal negotiations are complete, given the uncertainty of the outcome,” they said.
Despite Moody’s relatively optimistic assessment of London’s prospects, Mark Boleat, the policy chief at the City of London Corporation, insisted that passports remained a source of concern.
“Passporting is still a crucial issue for financial services firms and the uncertainty is causing real problems for some businesses,” he said.
“In the City many firms are still analysing what impact the loss of passporting will have on them.”
“For some retail banks it is of almost no real importance. But for the whole of international investment banking and an institution such as [insurance market] Lloyd’s of London it is an absolute necessity.
“We are making this point clear to policy makers in our ongoing discussions.”