Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

It's a sad state of affairs when European unity is splintering before the U.K. has even officially triggered the process of leaving the EU. It's worse for the City of London that banks and insurers can't easily exploit that to their advantage.

Bankers On The Move
U.K. banking headcount will be exposed to potential Brexit relocation
Source: Bloomberg News

Regulators, officials and ministers across Europe have spent the past week throwing rocks at each other about the U.K.'s key export product, financial services, and whether it will find an acceptable route into the single market after Brexit. Like Europe's motto, "united in diversity," everyone agrees there's a problem. Nobody can agree exactly what it is.

Former Bank of France governor Christian Noyer says the problem lies in giving U.K. financial firms free access to the single market by granting them so-called equivalence status. That would allow U.K. firms to sell services in the EU as long as domestic regulation and supervision was deemed robust enough. Noyer argues that would rock the very foundations of the single market.

The European Central Bank and European Securities and Markets Authority say the problem lies in the way Europe-wide rules work. They might allow banks or investment companies to sneak in under their noses with a structure that isn't adequately capitalized or supervised.

Ireland says the problem is other member states. They're engaged in a regulatory "race to the bottom" over which national regulator has the lightest touch.

And Germany's Wolfgang Schaeuble thinks the problem is all the hostility. He wants the City of London to be "strong."

Behind this display of national interests, a valid point is being made. Europe shouldn't damage its own market just to preserve ties with its top financial center, and regulators are right to be worried about financial stability following Brexit.

The takeaway for big banks and investment firms in London should be that preparing for Brexit means planning for what rules might look like in two years' time, not for what they look like today.

While a full-scale exodus of London's financial sector still looks unlikely, the dream of a low-cost Brexit, with most employees staying in the British capital while a token number relocate to the EU, is fading by the day. Equivalence today might be different to equivalence tomorrow if it comes with strings attached like more direct supervision; likewise, any perceived loopholes in the way bank branches are regulated might be easily closed.

It would therefore be a good idea for City firms to start disclosing the cost of their Brexit plans. The triggering of Article 50 will probably be that catalyst. Shareholders deserve to be warned about the cost of restructuring, and those estimates need to be conservative. UBS Chairman Axel Weber took the right line last week when he said the Swiss bank could no longer "postpone" a decision on whether to move as many as 1,500 jobs from London.

Divorce Bill
The estimated cost of ring-fencing subsidiaries is high. Brexit should be cheaper
Source: Citi
Barclays cost is combined with U.S. subsidiarization. HSBC's cost estimate is between $1-$2 BLN.

What could those costs be? There aren't many obvious comparisons. Setting up separate subsidiaries in the U.K. under the country's new ring-fencing rules is expected to cost HSBC Holdings Plc and Royal Bank of Scotland Group Plc about $1 billion each, according to analysts at Citigroup. Brexit isn't likely to be as costly, given most firms already have operations on the continent. But it would be better to scare shareholders today and over-deliver with a pleasant surprise in two years, rather than the reverse.

It doesn't seem like Europe can agree on what the grand plan for the City of London should be post-Brexit. But it's time for the City to explain what the worst case might cost.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net