Britain’s partners are stepping up warnings that if it votes next week to leave the European Union, banks and financial firms based in London could lose their money-spinning EU “passports”.
The City of London vies with New York as the world’s biggest financial centre in part thanks to the automatic right to sell services across the 28-nation bloc with low costs and a single set of rules under a system known as passporting, industry and European officials said.
Asked by Reuters what would happen in case of a Brexit after the June 23 referendum, French Finance Minister Michel Sapin said: “There will be no passport, or that would have to be negotiated against a lot of reciprocal concessions.”
Sapin said aloud what many EU officials and diplomats are saying privately. Unfettered access for financial services is widely seen as the “crown jewels” of British membership benefits, and London’s partners would charge a high price for keeping it, if they were willing to do so at all.
Germany, France, Luxembourg and Ireland would all be vying to pick up business from London in areas such as investment banking, clearing and settlement and fund management.
EU membership gives Britain access to what effectively is a “financial Schengen zone” – a single set of rules that allows banks, including many U.S. and other non-European institutions, to operate freely across the bloc’s borders.
Just as the 26-nation Schengen area, which Britain has never joined, permits citizens to travel without border formalities, the single market allows lenders, fund managers and investment firms to operate EU-wide without different national rules and controls.
Britain is the biggest beneficiary as UK-based banks and investment firms play a key role in European financial markets for derivatives, foreign exchange, cross-border bank lending, asset management and insurance services.
A passporting system allows British-regulated banks to open branches in EU countries simply with a notice to the British supervisory authorities.
Financial services account for 8 percent of British national income, according to the Bank of England. The sector accounts for almost a quarter of all EU financial services income and 40 percent of EU financial services exports. Eighty of 358 banks operating in Britain are headquartered elsewhere in Europe.
“A key concern of many UK banks and investment firms is that the exit of the UK from the EU would mean that they would no longer benefit from the passport and would be subject to similar restrictions as non-EU firms,” banking lobby AFME said in a report that raised doubts about the future of London as a hub for continental financial services.
The impact would be as severe on American, Japanese and other non-European banks that have their European headquarters in London. Many are already considering giving up parts of their business in Europe, or moving them to inside the euro zone, in the event of a Brexit.
Banks would still be able to set up subsidiaries, as opposed to branches, in European countries where they seek to operate, but a banking industry official said “this implies bigger commitments and higher costs”. Subsidiaries have to be capitalised separately and are subject to national regulation and potentially to national ring-fencing of liquidity.
The EU treaty provides for two years to negotiate a divorce once a country decides to leave. That period could only be extended by unanimous agreement. When exactly the countdown starts would depend on when a British government formally notified EU partners of its intention to leave.
EU officials say it is unlikely that Britain would give notice at a summit on June 28-29 if next week’s referendum vote produces an “Out” result, but they want the process started by the end of the year.
European Commission President Jean-Claude Juncker has said Britain would have to negotiate withdrawal terms first and become a “third country” before it could reach agreement on any new relationship.
Britain could theoretically keep the passport system if it became part of the European Economic Area of which Iceland, Norway and Liechtenstein are members.
But this would mean applying all EU rules automatically without its existing power to influence the legislation. It would also mean paying a contribution to EU coffers for market access and fully implementing the so-called “four freedoms” or movement for capital, goods, services and people.
Since putting an end to the automatic right of EU citizens to work in Britain and stopping net transfers to Brussels are two of the key goals of the Leave campaign, it seems hard to imagine a post-Brexit government accepting such terms.
Yet German Finance Minister Wolfgang Schaeuble said last week Britain would not be able to continue benefiting from the single market unless it did.
“For that, the country would need to stick to the rules of the club that it now want to quit,” Schaeuble told Germany’s Der Spiegel magazine. “In is in, out is out.”
Alternatively, Britain could try to negotiate bespoke deals with the EU, as Switzerland has done. But this would take much longer than two years, even if the two parties were in full accord, EU financial services commissioner Jonathan Hill told the European Parliament on Tuesday, citing past examples.