LSE CEO Sees Brexit Risking 232,000 Jobs, Market Stabilityby and
CEO Rolet joins HSBC, Allianz Global Investors in warnings
HSBC chairman compares financial system to Jenga game
London financial bosses entered 2017 with renewed warnings about the potential impact of Brexit.
Speaking in testimony Tuesday before the Treasury Select Committee in the capital, London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet outlined the most dire threats should officials fail to implement an orderly transition out of the European Union. Rolet said the impact wouldn’t just lead to 232,000 job cuts and the loss of the U.K.’s vital clearing business, it would pose a risk to broader financial stability.
Testimony from HSBC Holdings Plc Chairman Douglas Flint and Allianz Global Investors Vice-Chairman Elizabeth Corley echoed Rolet’s warnings on the need for a longer-term, “grandfathered” transition plan.
Financial services bosses have pleaded for a so-called “soft Brexit” that would somehow preserve access to the single European market as much as possible. While those hopes seem to have faded in recent weeks, the executives in their testimony today reasserted their desire for some sort of transitional agreement to be negotiated by Prime Minister Theresa May’s government to protect London financial companies.
“What is required to maintain stability and customer behavior, no disruptive changes, is grandfathering of the existing conditions for a limited period of time in parallel to Brexit negotiations,” Rolet said.
HSBC’s Flint reiterated his call for a two- to three-year “standstill” or transition period that maintains the status quo, regardless of the outcome of negotiations, to allow banks time to restructure their operations and move, hire and train staff.
“Our regulators and customers expect us to plan for the worst,” the chairman said. “We need to assume what might happen if we end up with a break after the Article 50 process with no vision of where we are going and no transitional arrangement.” Article 50 refers to the trigger for Britain to formally begin the two-year process of leaving the EU.
Before the referendum, the bank said it will move 1,000 investment bank staff to its office in Paris if the U.K. voted to leave. HSBC executives have since softened their stance, saying the number represents a worst-case scenario and the firm can afford to wait and see how negotiations play out by virtue of its already licensed French subsidiary, a luxury many American peers do not have.
Euro-derivatives clearing has been a key battleground ever since Britons voted in June to leave the EU, with leaders from Germany and France threatening to strip those operations from London. A massive shift in trillions of dollars in risk assets and thousands of jobs could begin unless officials agree on a way to, at least temporarily, guarantee the existing framework, Rolet said. The grandfathered period should last more than two years, he said.
If euro derivatives clearing were somehow stripped from London, a rival to LSE could be the beneficiary, depriving the company of a lucrative business. Since the referendum, Rolet has framed the issue as even bigger than the company he runs, saying it would hurt the financial industry as a whole and could even weaken all of Europe by driving jobs and services to New York.
He amped up his warnings today: Rolet had previously said 100,000 U.K. jobs are at risk if clearing were clawed away to another territory. Today he raised that number to 232,000, referring to an EY consultancy report, saying two-thirds of them are outside London.
The European Central Bank could mandate euro clearing to move, as it has tried to do before, or use regulatory details to effect the change, he said. Rolet warned in November that talks are already underway within the EU to limit euro clearing outside their jurisdiction, a sign of how badly the bloc wants London’s financial turf.
“Since basically the outcome of the referendum, we have seen calls by continental regulators to customers warning them of the risk euro clearing would be mandated to leave the U.K.,” Rolet said.
Flint warned Brexit could lead to not only London losing jobs in financial services, but Europe as a whole. Unless there is clarity soon on new arrangements, U.S. investment banks will be loath to invest more capital in the region considering their home market and Asia are far more lucrative.
“All of us are struggling with what we call Jenga,” Flint said. “I.e., are there individual pieces that don’t look particularly important, but are actually crucial to the underpin of the edifice of the cluster that exists today?”
He referred to the clearing industry, one of the “major pieces,” which is “not the sexy piece, but effectively the most critical piece.”