Brexit accord leaves British finance out in the cold

Britain’s financial services greeted the news of a draft Brexit agreement with weariness and worry on Thursday, citing multiple hurdles the government must overcome before they can Brexit-proof their industry.

Shares in blue-chip banks tumbled after British Brexit Minister Dominic Raab resigned to protest the agreement with the European Union, saying it presented a “very real threat to the integrity” of the UK. Three other ministers followed suit.

News of the resignations – which threaten the survival of Theresa May’s government – pushed UK banking shares even further into the red.

Shares in Royal Bank of Scotland (RBS.L) were trading down 7.3 percent by 1013 GMT, their biggest one-day fall since the June 2016 referendum. Barclays (BARC.L) and Lloyds Banking Group (LLOY.L) dropped 6 percent each.

The mood music today is that it doesn’t do for the City’s financial sector,” said Chris Beauchamp, chief market analyst at IG.

Even before Raab’s resignation, the industry found little to celebrate in the draft plan. It gives UK banks, insurers and asset managers limited access to European financial markets after a transition period that starts in March and is due to end in December 2020.

Such an arrangement, a regulatory framework known as equivalence, would give Britain access to the EU similar to that of major the U.S. and Japan, while tying it to many EU finance rules for years to come.

Industry leaders, including John McFarlane, the outgoing Chairman of Barclays and lobby group CityUK, had hoped policymakers could negotiate an “enhanced equivalence” relationship between the UK’s financial industry and the EU.

But the 568-page document gave little grounds for optimism that such an alliance – offering greater access and tighter safeguards against a sudden loss of rights – would be forged.

We are not going to get anything more than the U.S. gets. The only addition is that equivalence can be applied for in the transition period, fast-tracked,” said a U.S. investment bank official based in London.

“We don’t really figure in any of this. The deal is all about solving the Irish question and customs union,” the official said. “The rest of it is about divergence and competitiveness for services. Raab has resigned. It all feels very knife edge.

Analysts predicted a freefall by UK assets, with risks of major economic disruption and a change in government looming large. Policy responses could include a cut to base rates, according to Investec anayst Ian Gordon, which could further hurt bank profit margins.

Such an arrangement, a regulatory framework known as equivalence, would give Britain access to the EU similar to that of major the U.S. and Japan, while tying it to many EU finance rules for years to come.

Industry leaders, including John McFarlane, the outgoing Chairman of Barclays and lobby group CityUK, had hoped policymakers could negotiate an “enhanced equivalence” relationship between the UK’s financial industry and the EU.

But the 568-page document gave little grounds for optimism that such an alliance – offering greater access and tighter safeguards against a sudden loss of rights – would be forged.

We are not going to get anything more than the U.S. gets. The only addition is that equivalence can be applied for in the transition period, fast-tracked,” said a U.S. investment bank official based in London.

We don’t really figure in any of this. The deal is all about solving the Irish question and customs union,” the official said. “The rest of it is about divergence and competitiveness for services. Raab has resigned. It all feels very knife edge.”

Analysts predicted a freefall by UK assets, with risks of major economic disruption and a change in government looming large. Policy responses could include a cut to base rates, according to Investec anayst Ian Gordon, which could further hurt bank profit margins.

With little certainty on the fate of the deal and whether May can survive a backlash Barclays from a growing number of political opponents, senior industry sources said banks would move ahead with plans to reorganize their businesses accordingly.

We are monitoring the negotiations, especially with respect to financial services. However, we are continuing to establish an EU subsidiary in Frankfurt to ensure we can provide uninterrupted services for our clients in all potential circumstances,” a Standard Chartered (STAN.L) spokesman said.

But as the ministerial resignations from May’s government mount up, others fear a far longer phase of volatility.

“... This deal is now the only game in town – there is now no time to negotiate another deal. We thought we had stability – now we have instability writ large,Iain Anderson, executive chairman of the public affairs firm Cicero, which represents many finance companies.

 

/reuters.com

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