Brexit Could Harm City of London on Passport Loss, Lawmakers Say

shopping district in London, U.K., on Thursday, May 26, 2016. Newly elected Mayor Sadiq Khan has dropped the Greater London Authority's objection to London City Airport's plan to purchase land it will need if its expansion plans are approved by the U.K. government later this year.

Photographer: Chris Ratcliffe/Bloomberg

A U.K. vote to leave the European Union could diminish the country’s financial-services industry by leading to the relocation of some activities to the continent, the House of Commons Treasury Committee said.

If firms located in the U.K. lost the so-called passport that allows them to provide services anywhere in the EU from a single country, this wouldn’t be fatal for financial services in Britain, whose “competitiveness is founded on a wider constellation of factors, including time zone, language and the legal system,” the committee wrote in a report published on Friday.

“But it would be plausible to suppose that some relocation of activity, particularly by foreign banks that currently base their European operations in London, might take place,” as Bank of England Governor Mark Carney has suggested, according to the report.

The referendum campaign has hit high gear in the run-up to the June 23 vote, and the fate of Europe’s largest financial center remains a point of contention. The Treasury has said that a so-called Brexit would put tens of thousands of jobs in the financial sector at risk.

Jonathan Hill, Britain’s representative on the European Commission, the EU’s executive arm, said loss of the passport that gives companies full access to the single market would force them to set up subsidiaries within the bloc. And that is “neither cheap nor simple,” he said.

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The Treasury Committee pointed out that maintaining the passport would probably require the U.K. to have rules equivalent to those in the EU.

“This would limit the U.K.’s flexibility, from outside the EU, to set its own regulatory framework, and it would lead to a loss of influence over financial regulation with which it might nonetheless have to comply or adhere,” the committee wrote. “In this sector, the trade-off between domestic regulatory control and market access is particularly acute.”

Moreover, the decision to grant passporting to U.K. companies would have to be approved by the EU legislature, meaning the process could become politicized, the committee said.

“It is possible that other EU institutions or governments might no longer wish to allow such a large proportion of financial services activity to take place in what would become an offshore center,” the committee wrote.

Derivatives Trades

Leaving the EU could also imperil London’s prominent role in clearing derivatives trades, the committee said.

Clearinghouses based in London, where about three quarters of European derivatives trades take place, are of systemic importance and the European Central Bank might try to force clearinghouses dealing in euro-denominated transactions to relocate within the euro area.

’There can be no discrimination within the EU,” Hill wrote in evidence to the committee. ”But outside, there can be no guarantee that the clearing of large euro-denominated transactions in the U.K. could be undertaken on the same terms as today, in terms of to whom services can be provided or under what conditions.”

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