Banks based in Britain will probably have to move some operations to the European Union to preserve market access after Britain leaves the EU, because any replacement for the current setup will be imperfect and risky, Bundesbank board member Andreas Dombret said on Friday. Banks are likely to lose their passporting rights and have to prepare for instant divergence, Dombret said in London. They should not put great hope into an equivalence decision or a free trade agreement, because even a transition period between Britain and the EU will be difficult to negotiate.
"In the end, there might well be two separate jurisdictions in which (banks) operate, and these jurisdictions might diverge over time - or instantly, once the divorce has gone through," Dombret said. "So it seems that the prospects for EU market access through the UK look rather dim," Dombret said. Britain's vast financial sector relies on 'passporting' rights to freely sell services across EU, keeping the bulk of their operations in London. That set up looks likely to end as Britain is opting for a comprehensive separation from the bloc.
"I expect London to remain an eminent global financial centre," Dombret added. "Nevertheless, I also expect a number of UK-based market participants to move at least some business units in order to hedge against all possible outcomes of the negotiations." But banks should not try to trick regulators and must move actual operations to the continent if they want to do business in the EU, Dombret warned. "We will not accept any empty shells or 'letterbox companies' where the business effectively continues to be done out of London," he said.
"I urge banks not to spend their time inventing strategies to circumvent these requirements," Dombret said. "This includes seemingly creative solutions such as 'fly-and-drive' banking, where bankers fly in daily from London, or 'dual hatting', where transactions are booked on the EU subsidiary but in fact executed in London."
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