The 1st January 2021 marked the end of the United Kingdom’s transition period in leaving the European Union. The free movement of goods ended. So has that of the people. And, as such, trade and transnational markets were substantially impacted.
Significant changes were scheduled to take place, coming from both the Bank of England as well as the European Central Bank (ECB) – but how are things going almost a year later?
To prepare for the 27-member European Union, the ECB had committed to provide information on expectations for banks about their post-Brexit operations. In early 2021, it drafted and published the Supervisory Expectations on Booking Model, a document containing guidelines as to what was awaited by the ECB concerning the UK.
A detailed number of projections were mentioned. Banks were expected to complete their Brexit plans in accordance with national and European supervisions. The ECB was not just encouraging them to transfer “a certain number” of employees, but an “appropriate” amount of both junior and senior jobs.
It reiterated that EU products and transactions with clients should only be booked within the Eurozone, and that the purpose of UK-based business should be the one of the “third-party country” status that they now hold, limiting their scope of action to meeting local needs, instead of taking part in important international operations.
The ECB was also specifically careful to mention the regulating of non-ECB approved internal models used by some relocating banks. Indeed, the approval of internal models is essential to risk management in large banks, especially in the context of shift of financial operations.
Big corporations who have been previously using the UK’s PRA (Prudential Regulation Authority) approved models have until the 30th of June 2022 to transition their risk management operations into ECB verified ones, showing motivation from the ECB to recenter the exercise of control back to on-shore Europe.
What is clear is that the European Central Bank was, and is still, standing in favour a clear separation of the UK’s financial operations and advocates a will to relocate most business branches to the Eurozone.
But the European Central Bank’s enthusiasm regarding this drastic separation of financial operations does not seem to be enough. While many predicted the UK to be disastrously affected by the relocation, Ernst & Young estimated that around 7,600 jobs and £1.3 trillion would be relocated to the Eurozone.
Even though this number is significant, it does not confirm the Bank of England’s dramatic ‘10,000 jobs lost in a day’ forecast. Until April 2021, 440 firms had started relocating parts of their businesses, but only 3 firms had completely left the UK. This is way less than expected. It is obvious that banks will be less likely to use London as their ‘way of entry’ into the EU.
But big companies seem resistant to leave the City, as they are faced with the difficult realities for banks aiming to leave Europe’s main financial hub. Economic and trade dependencies created over the years seem hard to get rid of: firms are looking stuck deeper in quicksand than anticipated.
Faced with this resistance to change, action was taken and complaints were heard in Frankfurt. The ECB’s June 2021 decision to terminate the pandemic related “pause” of relocation, has shed light on the issue again, pressuring firms to resume their shift. Banks have witnessed more pressing demands from the European Central Bank to move capital and resources to the Eurozone, especially traditionally London-implanted firms.
The ECB is quickly expecting banks to no longer use the City as their main headquarters to manage capital and staff across Europe. Its actions are described as ‘certainly stricter’ by surprised bankers – and while the ECB is simply enforcing what was previously agreed, there was a common belief that the Bank would be more flexible. This could create issues for smaller business entities, who are faced with the obligation to re-evaluate large parts of their commerce in order to conform with regulations.
Does this severe reaction create tensions between the ECB and the Bank of England? The two central banks refused to comment. But it is very likely. An indirect back and forth of opinions has been expressed by the two.
The Bank of England’s general stance is concern that the ECB is asking for too much and unnecessary relocations to the continent, fearing loss senior jobs, revenue and reputation. On the other hand, Edouard Fernandez Bollo, an ECB supervisory board member maintains that “activities and services involving EU clients should be carried out predominantly in the EU”.
These rising tensions shed a negative light on the relationship between the UK and Europe, which has been criticised by international bankers as a difficult and very politicised scene to navigate.
It is clear that the ECB’s most recent push shows a certain exasperation of the EU faced with London’s reluctance to act. Discouragingly however, post-Brexit hurdles and complications seem extremely likely to continue being part of Europe’s financial landscape.
