An influential German central banker has said Brexit will “end” the UK’s position as the dominant financial services centre in Europe, after “numerous” financial services firms explore moving operations to the EU.
The UK will lose its position as a “gateway to Europe” for the world’s financial services industry, according to a speech by Dr Andreas Dombret, an executive board member at the Bundesbank in a speech earlier this week in Frankfurt.
The current model of using London as a "gateway to Europe" is likely to end, he said, with the removal of passporting rights for UK banks and other financial firms.
Dombret added that “numerous market participants" have already contacted European regulators over moving operations to Europe.
Passporting allows financial firms to trade in all countries of the European Union (EU) as if it were their home country. However, the UK government has placed control over immigration as a higher priority than market access, leaving British financial firms scrambling to find ways to continue trading freely.
Some regimes are more equivalent than others
The UK would almost certainly be eligible for regulatory equivalence on first leaving the EU, which allows continuous trading in a similar manner to passporting. However, Dombret suggested equivalence will not be sufficient for the UK to remain the main European financial centre.
“Equivalence decisions are no ideal substitute for passporting,” he said, pointing to the “reversible” nature of equivalence if the UK regime is deemed to have moved too far from EU regulations.
Dombret described Brexit as part of a broader "trend we are seeing towards renationalisation", but said the EU will not pursue a mercantilist "regulatory race to the bottom" if the UK moves to attract business through deregulation.
That was echoed by the EU's commissioner for financial services, Valdis Dombrovskis, who told City A.M. the EU was committed to an international regulatory architecture, and would not look to "punish" the UK for voting for Brexit.
Dombret also warned “it is unclear how likely” a transitional arrangement during negotiations would be, owing to its “politically sensitive” nature.
Moves across the Channel
However, he did say a confrontational approach is "not in the interest of either the UK or the EU” and that the UK will “remain an important financial centre”, but predicted more firms will move operations out of the City.
“I also expect many UK-based market participants to move at least some business units to the EU in order to hedge against all possible outcomes of the negotiations,” he said.
On the much-debated clearing issue, Dombret added it will be "impossible" for euro clearing to remain in London if the UK does not remain bound by the European Court of Justice – a red line for Prime Minister Theresa May.
“Continuation of clearing strongly depends on the acceptance of the European Court of Justice,” he said.
“I see strong arguments for having the bulk of the clearing business inside the euro area.”
Dombret manages banking and financial supervision for the German central bank.