By Sara Sjolin, MarketWatch
The U.K. financial sector stands to lose its key passporting rights that allow it to smoothly operate across the EU if Brits opt for a “hard Brexit,” Bundesbank president Jens Weidmann has warned.
In an interview with a U.K. newspaper , the German central bank boss and European Central Bank Governing Council member said London’s position as a global financial center could be at severe risk if the British government fails to negotiate a deal to remain within the European Union’s single market.
Some leading Conservative party members are currently pushing for a so-called hard Brexit option, which would end free movement between the U.K. and the EU and cut trading ties with the remaining 27 member states.
But by exiting the single market, the passporting rights for financial firms “would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area,” Weidmann said in the interview with the Guardian.
The European Economic Area is seen as an “EU light” option, which gives member states, such as Norway, access to the single market in return for adopting most EU legislation.
Retaining passporting rights is a crucial post-Brexit issue for U.K.-based banks, insurers and funds as the mechanism allows them to sell their services seamlessly in any EU member state, without having to obtain a local license.
UBS Group AG /zigman2/quotes/206172872/composite UBS +1.46% /zigman2/quotes/206994749/delayed CH:UBSG -0.66% , Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS -0.79% , Russia’s Sberbank /zigman2/quotes/201401563/composite SBRCY +1.49% , J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM -0.01% and China’s /zigman2/quotes/201401473/delayed HK:1398 +3.60% are all among several international banks that use passports this way, according to the U.K.’s Financial Conduct Authority .
Losing the right means any financial institution using London as their EU headquarter would have to move to another country and “passport” their services into the rest of the union from there. They could also stay based in the U.K, and instead apply for regulatory approval in each country it wishes to continue to do business.
In any case, the industry has warned it will cost billions of pounds in office relocations, staff transfers, added paperwork and new capital requirements. There are also concerns jobs will be lost to other European financial hot spots, such as Frankfurt, Paris, Dublin and Luxembourg. Out of all the banks operating in the U.K., only 20% are headquartered elsewhere in Europe, according to Moody’s data.
“Of course several businesses will reconsider the location of their headquarters. As a significant financial center and the seat of important regulatory and supervisory bodies, Frankfurt is attractive and will welcome newcomers. But I don’t expect a mass exodus from London to Frankfurt,” Weidmann told the Guardian.
Moody’s Investors Service warned in a report out on Monday that the loss of passporting rights would be costly, but manageable for most financial institutions.
“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,” the ratings agency said.
The U.K. has yet to trigger Article 50, which formally kicks off the Brexit process with the EU. European Council President Donald Tusk said over the weekend that British Prime Minister Theresa May had told him the U.K. would launch formal exit talks in January or February next year .
May, however, rebuffed the claims, with a Downing Street source saying the prime minister didn’t specify a month, according to the Independent .