Photographer: Jasper Juinen/Bloomberg

Brexit ‘Nightmare Scenario’ Spelled Out by Giant Fund in Finland

  • Varma CEO says loss of financial know-how is main worry
  • Anglo-Saxon corporate governance model also seen under threat

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In the northernmost tip of the euro zone, the chief executive officer of a 45 billion-euro ($53 billion) pension fund says the biggest fear with Brexit is its potential to rip Europe’s financial markets apart.

“We can probably manage the economic impact of the U.K. leaving” the European Union, Risto Murto, who runs Varma Mutual Pension Insurance Co., said in an interview in Helsinki on Aug. 23. “The nightmare scenario is that somehow you build up the walls -- for example, split the market by requiring the asset-management operations to be inside the EU.”

Fourteen months after Britons voted to leave the EU, little is known of the shape the divorce will take. Key issues such as the cost of leaving and citizens’ rights have yet to be resolved, let alone the infinite complexities of how to approach a separation of U.K. and EU financial markets. Moody’s Investors Service said in July that the risk the U.K. will drop out of the EU in two years without a proper Brexit deal is “substantial.”

Read more: why Britain is saying ‘adieu’ to the European Union: QuickTake

According to Murto, one thing is clear. With Britain’s departure from the EU, the bloc “loses the impact of the City and the biggest concentration of know-how and tradition” in banking.

The lack of clarity on how Brexit will affect financial markets is hard to get past. The EU is trying to regain control of euro clearing, which has traditionally been handled out of London. Front- and back-office operations with customers in the EU may also need to move out of the City. Estimates of how many finance jobs may leave the British capital run into the tens of thousands.

Read more: Will Brexit trigger exodus of banks from London?: QuickTake Q&A

Reima Rytsola, chief investment officer at Varma, says he’s “not too optimistic on how Brexit negotiations will end,” during the same interview. “There is a lack of a plan on the U.K. side. European former top officials are speaking on the EU with a really strong ideological background. The U.K. is more pragmatic. They seem to be very far apart and that makes the negotiations much more difficult.”

Without the U.K., Europe also risks a weaker corporate governance environment, Murto said. That’s especially relevant for the EU’s northern members, where powerful boards tend to dominate, he said. He characterizes the U.K. as a champion of strong corporate governance, and the country’s departure will have “a big impact,” Murto said.

Negotiations were due to resume on Monday. U.K. Prime Minister Theresa May’s government is under growing pressure as the opposition Labour party makes clear it wants Britain to stay in the EU’s single market and customs union for a transition period of up to four years after it leaves the EU. Labour’s position may strengthen the hand of anti-Brexit Conservatives to achieve a softer split.

— With assistance by Emma Ross-Thomas

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