These are turbulent times for the UK – and for banks. International banking is probably more affected by Brexit than any other sector – it is our biggest export industry far, it gets its rules and right to serve cross-border from the EU, and it is internationally mobile.
Fortunately, our banking sector weathered the initial storm after the referendum, and the economy has so far proved to be resilient. It was evidence that the banks are in a much stronger position than 2008, with capital held by the largest institutions 10 times higher than before the crisis.
But the biggest challenge comes not from the referendum itself, since the day after nothing had actually changed. The biggest challenge will come when we actually leave the EU in 2019. The industry wants to ensure it can carry on serving their customers both in the UK and across Europe.
In order to do this, banks need as much clarity as possible over the the exit negotiations so that they can plan for the future with confidence. The Prime Minister has put an end to uncertainty around the timetable for the negotiations by pledging to trigger Article 50 no later than the end of March 2017.
But banks now need clarity on what sort of future relationship the government wants the UK to have with the EU. We are working with ministers and officials to deliver the best deal for the UK, and for Europe.
This is in the interests of all Europe, because bilateral market access underpins jobs and growth on both sides of the Channel. Europe’s integrated financial markets have been good for jobs and growth across the continent in the past, and will be good for jobs and growth in the future. The integrated financial market makes it easier and cheaper for French farmers, German manufacturers and Italian fashion designers to secure funding. It also helps EU citizens get better returns for their savings and have access to a wider range of products.
We need to retain Europe’s integrated financial market, not split it in two by building walls along the Channel. We need to retain the free trade in financial services. The only way to ensure that, is for banks based in the UK to retain full access to the single market in financial services – and for European banks to retain full access to the UK’s global financial centre, and customers. In other words, we need to retain some version of passporting.
The alternatives, such as equivalence, are poor shadows of genuine passports. They only allow a much narrower range of services, provide much more limited rights at greater cost, and can be withdrawn at short notice.
Other centres are actively lobbying banks to move jobs and business away from the UK. I recently heard that the French Treasury told a group of banks it was trying to persuade to move to Paris that although the UK might have to be granted equivalence initially, the question is how quickly they could force the UK to lose equivalence. This would be the worst of all worlds, forcing the UK to be a “ruletaker” if it is to remain equivalent, with no say over regulatory changes that would affect our future.
This underlines that London’s position as Europe’s financial capital should not be taken for granted. Whatever the ultimate deal between the UK and the EU, it is likely to take years to negotiate and yet more years to ratify. It seems highly unlikely we will have it in place when the UK leaves the EU in 2019.
If that happens, the UK will fall back on WTO rules, which have no meaningful provision for financial services. We will overnight lose the passports that underpin the free trade in financial services. We face a “cliff edge” where suddenly the £20 billion a year cross-channel trade in financial services would be thrown into legal uncertainty.
In many cases, UK banks will no longer be able to legally sell services to their customers in the EU. There is a big risk to disruption to markets. That is why it is so important for the industry to have transitional arrangements, to ensure customers can continue getting the financial services they need between the UK leaving the EU, and the new UK-EU partnership agreement coming into force.
We want an orderly transition that minimises any potential disruption for customers, businesses and markets. With so much uncertainty about the next couple of years, international banks are all planning for the worst case scenario – that we end up on WTO rules.
They have set up project teams to work out what operations they need to move by when, and how best to do it. It can take years to move a business. So they cannot wait until the end of Article 50 negotiations in 2019, but have to start taking action much sooner.
Their hands are poised quivering over the relocate button, with the first movements expected in the coming months. There is no room for complacency. We need a Brexit that works for both the UK and the EU 27.
Of course Brexit is only one of the challenges facing us today. Interest rates are low or negative across the continent. Growth has remained flat at best for almost a decade. The macroeconomic outlook in the UK and Europe is sombre.
These conditions have increased pressure on revenues and profitability across the sector. And made it more difficult for banks to deliver a sustainable return on equity. A strong banking sector underpins a strong economy. That is why it is crucial that the UK Government sets out a clear vision for the UK’s future as an international banking centre.
The industry has faced five bank specific taxes in recent years – raising more than £40 billion for the Exchequer. Banks are firmly committed to paying our fair share. But we are now at a tipping point that threatens UK jobs and growth. It is essential that the UK remains a competitive place to do business for international banks.
We hope that the Chancellor will take competitiveness into account when he delivers his first Autumn Statement next month. We believe there should be a commitment to the normalisation of banking taxes in the UK and the removal of sector specific tax measures. In particular the date for the reduced scope of the bank levy should be brought forward to within the life of this Parliament.
There should also be a commitment to the banking tax surcharge being seen as a temporary measure, designed to compensate for historically low corporate tax receipts that are already beginning to correct. The banking corporation tax surcharge should be phased out as soon as possible.
This is no time to rest on our laurels. If the UK is to stay ahead in the global race, we must seize new opportunities on the horizon. The City of London has always embraced new markets, helping to provide the finance and expertise needed to support trade around the globe. London is the premier western offshore Renminbi centre and the volume of Islamic finance taking place in the UK is increasing rapidly.
FinTech is if anything an even bigger growth opportunity. Silicon Valley has long been regarded as the home of digital innovation but a recent report from EY rated the UK as the world’s leading FinTech centre. Digitisation of banking is a huge opportunity – not simply a threat. Banks are keen to support the sector’s growth. We are increasingly seeing FinTechs collaborate with banks as they try to scale up their businesses.
There is no denying that the industry still has a number of big challenges to overcome. We live in interesting times. That is why it is essential that we work together to seize the new opportunities on the horizon And ensure that long after Brexit is a distant memory we remain a world leading hub for international banking.
This is an edited version of a speech Anthony Browne delivered to the BBA’s Annual International Banking Conference.
