White & Case held a panel event "Perspectives for the European financial market in a volatile environment" in Berlin during the 21st German Banking congress. The panel included Lord Darling the former Chancellor, Claire Jones the Bureau chief of Financial Times in Germany, Marcel Fratzscher, a leading German Economist as well as our own partners Oliver Brettle, Henning Berger and Dennis Heuer.
Watch the highlight videos below:
How likely is it that negotiators will achieve a best deal for both sides to allow an integrated and work-based financial system between the EU and the UK?
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Lord Darling, Former Chancellor of the Exchequer, UK "In an ideal world, both sides would work hard to get an agreement that suits everybody, but this is about politics and those feelings are running quite high at the moment. In an ideal world, you would allow financial services to trade across borders because we all benefit from that. You’d have passporting, you’d certainly have transitional arrangements, but a lot is at play here, and my guess is that it will take some time before we reach that stage, if indeed we do reach it at all."
Claire Jones, Head of Frankfurt Office, Financial Times "My own view on this is that unfortunately it is very unlikely that a best deal for both sides will be achieved. The EU cannot be seen to be giving the UK too good a deal in the event of a Brexit, and because of that, people on both sides will lose out, both in the EU and in the UK."
Dr Martin Lück, Chief Investment Strategist, Black Rock "Going down into the negotiations, it will become clear that both sides have an interest in achieving a very good deal at least. That will become more visible as we come to the end of the two‑year horizon of the Brexit negotiations."
Dr Henning Berger, Partner, Banking, White & Case LLP "There is a good chance that they will achieve a best deal for both sides for the financial industry. Why is that so? Because we have a highly integrated financial system in Europe today, and to change that would be very harmful for the European Union as well as for the UK."
Prof. Dr. Marcel Fratzcher, President, German Institute for Economic Research (DIW) "My big worry is that we might not get the best deal for both sides, because there is still a mentality of ‘we are going to benefit at the expense of the City of London and the financial system’, thereby pulling companies towards the Euro area, towards the EU and vice versa. So my big worry is that we haven’t really understood yet that it’s a win-win or a lose-lose situation, not a ‘we gain at the benefit of London’ situation."
Over the course of negotiations for the next two years, what are the principal areas of discussion that should be of foremost interest to financial institutions?
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Lord Darling, Former Chancellor of the Exchequer, UK "I think there’s a number of issues. Clearly the ability to move people around is important to the financial services industry, but it’s also highly contentious. It was the big issue, if you like, in the Brexit referendum in the UK last year, but there are other issues too, like passporting, the ability to sell your products across borders and the fact that London, whatever happens, will still be one of the world’s pre‑eminent financial centres. It’s in Europe’s interest that they have access to the London markets."
Dr Martin Lück, Chief Investment Strategist, Black Rock "What would also be a question is the extent to which London will remain the financial hub in Europe, given that larger American banks have been doing business in Europe so far even though London has always been the main hub for entering into the European Union. I think this will mainly remain the case, so the question is, to what extent can London be attractive and remain attractive for banks outside of Europe?"
Dr Henning Berger, Partner, Banking, White & Case LLP "We cannot expect that on the Brexit effective date we will already have a future framework in place which will safeguard the ongoing operations. Therefore there must be a transitional agreement, and this transitional agreement should provide for existing passports to run a little bit longer until there is certainty and a new good framework in place. The second big interest, of course, is that in the future framework, there will be a comprehensive, specifically UK equivalency regime which is as close as possible to the passport regime we have at the moment."
Prof. Dr. Marcel Fratzcher, Presdient, German Institute for Economic Research (DIW) "Clearly the issue of banking union and capital market union in the EU will be crucial for banks in particular in the UK, to establish equivalent principles that will allow British financial institutions still to have access to a new banking and financial environment in the Euro area."
Claire Jones, Head of Frankfurt Office, Financial Times "The present firms in the City of London can have passports which allow them to offer financial services around the EU. Whether or not that will be the case post Brexit is very much up for grabs."
What specifics must banks consider to mitigate risk as a result of Brexit?
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Lord Darling, Former Chancellor of the Exchequer, UK "The biggest risk is the uncertainty that comes of possibly not knowing what the outcome is going to be in March 2019. It’s entirely possible there will be an almighty car crash with nothing agreed to, or at best perhaps just heads of agreement and then a lot more to come."
Dr. Dennis Heuer, Partner, Capital Markets, White & Case LLP "I think banks will need to consider business and legal risks. Number one will be that you can continue to serve your client base and operate under a stable framework and then also have sufficient room for growth."
The Rt Hon. the Lord Darling of Roulanish, Former Chancellor of the Exchequer, UK "It may take some considerable time, and therefore a lot of uncertainty, and I’m afraid we just have to plan for that."
Prof. Dr. Marcel Fratzcher, Presdient, German Institute for Economic Research (DIW) "There are many different risks for banks not just based in London, but also on the continent in particular, such as the passporting issue. Will companies, both financial institutions and banks of the UK, still have access to the continent, and can they serve customers? And in particular, on equivalence principles, will they have different regulatory requirements to fulfil? So there are the two big issues and challenges for banks ahead."
Dr Martin Lück, Chief Investment Strategist, Black Rock "I think the biggest risk actually will be that many financial institutions and their clients could come to the conclusion that they need to move their business out of London, and that is probably the biggest risk to have in mind. I think it’s not going to happen, but we need to be aware of the risk at least, and so it must be clear right from the start that the EU will, at the end of the day, maybe not meet Great Britain halfway but at least go a part of their way, to not keep a too hard-nosed stand right from the beginning and to make sure for everyone that an acceptable, good deal is in the interest of all sides."
Dr Henning Berger, Partner, Banking, White & Case LLP "Uncertainty is the biggest risk today, and it will remain so for quite some time. Because of that, all banks should act immediately and undertake a full risk evaluation. They must analyse their operations. They must find out where they have a relationship directly or indirectly into the UK and vice versa, and then take action, in order to avoid falling off a cliff on the Brexit effective date."
Do you anticipate London losing its influence as a financial centre as a result of Brexit, and if so, who is likely to benefit?
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Dr Martin Lück, Chief Investment Strategist, Black Rock "First of all, I do not think that London will lose its status as the financial hub in Europe, simply because this status has evolved over decades, if not centuries. I think it will broadly remain the same."
Claire Jones, Head of Frankfurt Office, Financial Times "I think London will maintain its status as a big global financial centre. It’s got the resources in terms of people. It’s also a very attractive place for people to live; there’s a lot of cultural attractions there and other things that draw people into London. It’s got what I’ve described as a critical mass."
Prof. Dr. Marcel Fratzcher, President, German Institute for Economic Research (DIW) "I’m convinced that even after Brexit, whatever it will look like, London will remain the pre-eminent financial centre in Europe. No question London will suffer from Brexit, but I don’t think the Euro area, or the EU, will be the main beneficiary. I fear that a lot of financial activity will move to New York or to Asia as a result. So Europe overall will be a loser."
Dr. Dennis Heuer, Partner, Capital Markets, White & Case LLP "I do not expect that London is losing its influence as a financial centre, because London will probably now use and seize opportunities that arise and would not have arisen if there had been no Brexit."
Lord Darling, Former Chancellor of the Exchequer, UK "Much depends on what the final deal looks like. Obviously some UK firms may feel they’ve got to set up some sort of operation in the new European Union because they want to do business there, but when they look around Europe, it’s too early to say where they might go. There’s a lot of people bidding, but one of the things not considered is whether the regulators in each European country have the capacity to take on this new work, and how long it will take. I think the other thing that all of Europe needs to focus on is that a lot of this work may actually go to the United States, to New York. You can’t assume it’s just going to get moved around Europe, but as I say, a lot will depend on what is finally negotiated, and it may be some time before we know that."
Claire Jones, Head of Frankfurt Office, Financial Times "It will be interesting to see who gains. There are clearly a lot of centres in the Eurozone that could benefit, such as Paris, such as Dublin, such as Frankfurt. We could also see some jobs going further east, especially back-office jobs, but you could also see that while all of those centres could benefit, I’m not sure any of them will take on the sort of role that London has right now."
What are the key legal issues banks will be facing as a result of Brexit?
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Dr. Dennis Heuer, Partner, Capital Markets, White & Case LLP "I think by their nature financial institutions are regulated market participants, so it will be key that those market participants can rely on a stable and predictable legal and regulatory framework and know how to use it for the future."
Dr Henning Berger, Partner, Banking, White & Case LLP "One major legal issue many banks, especially in the UK, will need to face is how to cope with their current approvals and licenses. Many will need to set up new branches or subsidiaries on the continent and apply for licenses for those, and there will be no back to back operations between a London parent and, for example, a Frankfurt based subsidiary. The second legal aspect which is of great importance is that long running contracts may not be enforceable after Brexit. If European law must be applied to certain contracts and the jurisdiction being the European Court of Justice is required for the validity of a certain contract, then this contract must be ended and banks must take care that this is done soon enough. The biggest legal issues are related to the risk of a disruption of the business links between London and the European continent. The European passport that currently provides for doing services across the channel will definitely be lost, and the access to the London infrastructure will very probably be restricted. A good example is the clearing of euro-denominated derivatives in the London market that may probably be going back to the European continent."