Post-Brexit City firms must still abide by rules

Leaving the EU should not be a worry for the City of London, suggests Roger Bootle in the Telegraph. Financial services are worth 8% of UK GDP, and a significant export. But the City economist said there would be no post-Brexit “apocalypse”. Conceivably, firms could even set up a brass plate company in an EU country, so the activity takes place legally in one jurisdiction and substantively in another. 

Bootle told InFacts he regarded brass-plating as an “extreme” scenario. It is certainly an option that does not stand up to scrutiny. 

One major bank with significant operations in London told InFacts: “Bootle’s brass-plate scenario is very strongly incorrect, or at least misguided … it would quite simply not be possible to run all our operations from outside the EU.” The coming referendum is such a politically sensitive issue that the bank would not be named.

Graham Bishop, an expert in financial regulation, described Bootle’s scenario as “preposterous”. Europeans would not let the Brits get in under the radar, he continued: “It is a basic principle of financial regulation that you have to have capital within the jurisdiction of the place you’re actually doing business. Otherwise Europeans could get left with a hefty bill if things went wrong.”

Brass-plating clearly does go on in some sectors, for tax and regulatory reasons – witness the mass of companies perched in the tiny Cayman Islands. But if it were so easy to bypass EU financial laws, you might ask yourself why it was not already happening. Even if such loopholes did exist, they would almost certainly be closed if a financial centre the size of London started exploiting them. HSBC boss Stuart Gulliver said on 15 February that Brexit could mean moving 1,000 staff to Paris – rather more than is required to man a brass-plate office.

The fact is that after the crisis banking is facing intense scrutiny from regulators. No one wants a repeat of the Icesave debacle, when an Icelandic bank used passporting rules to expand aggressively in the EU without adequate protection for depositors. When the bank collapsed in 2008, the British and Dutch governments had to compensate savers to the tune of €6.7 billion. They were not fully reimbursed until last month. The EU authorities will be on guard against another under-regulated financial Trojan Horse.

The City might continue to thrive post-Brexit, bank bosses recently told Parliament. But, as Karel Lannoo at the Centre for European Policy Studies notes, the presence in the City of so many US-domiciled institutions is “clearly related to the EU passporting rules allowing for the free provision of services all over the EU”.  

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If the UK were not in the EU or the European Economic Area, financial firms might hope to win the right to enter the single market not via brass-plating, but by an equivalence system – where EU authorities officially deem that UK rules are equivalent to EU ones. This is how Swiss insurers do business in the EU – but it would be unprecedented for UK banks. In any case, a deal could take years to reach. It puts British banks at the mercy of what is essentially an EU political decision. It can mean applying rules and procedures that are just as tough, if not tougher, than those within the EU. And it’s clearly not a route that HSBC, with its contingency plans for Paris, is thinking of taking.

There are no quick wins in this area. The price for accessing the financial single market would be to play by its rules. Brexit would merely mean less UK say over how those rules are made.

Edited by Alan Wheatley

This piece was originally published on 15 February. An updated version was issued on 16 February to reflect Roger Bootle’s views more closely and to clarify that the use of equivalence rules would be unprecedented in the banking sector.