London-based banks and other financial services company should begin implementing plans to relocate to EU hubs by March or risk being left “high and dry” after Brexit, a senior member of the Bundesbank has warned.

‘Mutual recognition’ agreement over financial regulations

Andreas Dombret, executive board member at the German central bank, also cast doubt on the viability of a proposal by the City for a ‘mutual recognition’ agreement between the UK and remaining EU members that would result in both sides broadly accepting each other’s financial regulations.Speaking in London to UK Finance, the domestic banking industry body, Mr Dombret said, “I am sceptical as to whether such a mutual recognition framework is actually possible.“Moreover, a future agreement may very well be quite limited – for example, to the exchange of goods. Labour migration is likely to be excluded; at least, this has been mentioned as a red line for the UK government. And free trade in services also seems less and less likely.”A mutual recognition system, he argued, would necessitate handing substantial powers to technical supervisory committees, which, in turn, would undermine the UK’s Brexit ‘red lines’ of preserving national sovereignty and democratic legitimacy.Many banks and financial services companies have drawn up contingency plans to establish new European hubs, relocating jobs and functions from London, in the event the UK loses the ‘passporting rights’ that currently enable British-based firms to do business throughout the EU.

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• Citi now expects only a handful of London job losses
• UK rules out staying in customs union after Brexit
• Chorus of calls for Brexit clarity over financial services 

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Potential EU hub relocation

Mr Dombret said, “A ‘no deal’ on financial services is – like it or not – a realistic outcome. I strongly advise banks not to slow down in their preparatory efforts (to relocate) because of a vague possibility of a transitional period.“The first quarter of this year has been named by many in the financial industry as a point of no return for pushing the button on their Brexit contingency plans. In my view, this is still a fair estimate.“Those who do not complete their plans and start implementing them by March this year risk being left high and dry by Brexit one year later.”

UK’s financial sector “robust”

However, Ben Broadbent, deputy governor of the Bank of England, said in a radio interview that Britain’s financial sector would remain “robust” even if there were no Brexit deal.He told BBC Radio 4’s Today programme, “We have forecast, as very long run outcomes, a range of possible deals and we have also said we assume in our forecasts that there will be a smooth transition to those, which essentially means we’re not assuming a no-deal outcome.”Mr Broadbent continued, “What is true, is that the Financial Policy Committee, and I think this is the right way round, which worries about, or thinks about, sort of tail risks, potential disruptions – that’s its job really – has modelled various aspects of what could happen without a deal and was able to say at the end of last year that the stress test that it puts on the banking system once a year to try and see whether it’s got enough capital was at least as severe we thought as a no-deal outcome.“So we do think, and I think this is very important, that the core of the financial system – given how much capital has been added – would be robust to such an outcome.”

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Read more about the future of UK business in the Winter issue of our magazine 

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