TheU.K.'s governing Conservative Party, long seen as the banker's friend, isdistancing itself from the City of London as it prepares for crucialnegotiations on leaving the EU, aggravating fears of a "hard Brexit" potentiallycosting U.K.-based financial services companies up to £38 billion in revenueseach year.
PrimeMinister Theresa May promised to cut immigration following the June 23referendum in which Britons voted to leave the EU, while European officials havemade it clear that U.K. firms will lose access to the single market if there isany limitation on freedom of movement. The formal mechanism to launch two yearsof talks will be activated by the end of March, May said.
Thenew prime minister's brand of conservativism has moved away from thelibertarian championing of free markets that has been a party hallmark sincethe days of Margaret Thatcher. In her Oct. 5 speech to the party conference,May promised to reduce the economy's reliance on finance by encouraging thedevelopment of other industries, particularly high-tech and manufacturing.Reports that the government will make no special concessions to banks when itstarts what promise to be tough negotiations have further unnerved financeexecutives.
Financialservices companies are concerned about signs that some ministers in May'sgovernment may push for a "hard Brexit," including a complete breakwith the EU's single market that would endanger the that banks, insurersand asset managers use to market their services throughout the union, aspokesman for one prominent financial lobbying group said.
"Thereseem to be a number of different views within government, so we're watching tosee which one comes out on top," said the spokesman, who asked not to benamed. He also pointed to other reports that the government would favor atransitional deal with the EU after leaving it in 2019 to provide continuedmarket entry while the U.K. negotiates a new trade agreement with the bloc.
In aworst-case scenario, if negotiations lead to U.K. financial firms losing allprivileged access to the EU and having to rely on World Trade Organizationrules, annual revenues could fall by an estimated £32 billion to £38 billion,costing as many as 75,000 jobs, according to an Oliver Wyman commissioned by lobby groupTheCityUK.
Buteven as the political clouds darken and the pound tumbles to its lowest levelsagainst the dollar in 30 years, other financial markets — including U.K.financial stocks, which have rallied since their initial plunge after the shockof the referendum result — are showing signs of complacency, Jefferies analystJoe Dickerson said. Bank equities were not pricing in costs associated with anylikely Brexit deal, he argued.
"Itsounds like the politicians are not giving in on the free movement of people,that there is going to be some form of restructuring needed in the financialservices area, and that therefore that will require investment insubsidiaries," he said in an interview.
Dickersonwas skeptical of any significant change of heart toward finance on the part ofthe Conservatives — who, he noted, had already imposed a new bank levy beforethe Brexit vote — and said big London-based banks are already preparingcontingency plans for moving operations abroad if single-market access isrestricted.
OtherEuropean cities, including Frankfurt, Paris, Dublin and Luxembourg, are openly maneuvering to luresome of London's business their way, although officials even in these citiesconcede that the U.K. capital will likely remain the largest financial centerin the region.
Whetheror not banks, insurance companies and asset managers retain passports, it iswidely expected that the key business of euro-denominated clearing will migrate to the eurozone,a move that the European CentralBank had already tried to accomplish before the Brexit vote.However, this would not necessarily take a significant amount of investmentbanking with it, Dickerson said.
"Ifyou look at things like debt issuance and capital markets in London, they'revery deep and very efficient, and they're simply not in Europeanjurisdictions," he said."If your clearing's done in Frankfurt, it doesn't mean your debt issuanceis going to be done in Frankfurt, or your M&A advisory."
Yetfor all the industry concern about May and the party whose deregulation offinancial services in the 1980s – known as "the Big Bang" – setLondon on course to be the world's top financial center, the Conservatives maystill come out fighting the bankers' corner in the end, according to Tim Bale,professor of politics at Queen Mary University of London.
"Fromthe people I talk to, I think there is a very strong awareness amongConservatives that the City is still the goose that lays the golden eggs forBritain, and they really don't want to do anything that might kill it," hesaid in an interview."I think it is right to say that freedom of movement is going to go, but Iwould have thought they'll do everything they can to make sure that doesn'tmean the passporting rights go."