Banks will struggle to adapt by two-year Brexit deadline, AFME warns
Banks will need at least five years to "effectively" prepare for Britain's divorce from the EU and will struggle to adapt by the 2019 negotiation deadline, a financial lobby group has warned.
The Association for Financial Markets in Europe (AFME), which represents wholesale banking interests and lobbies on the behalf of members including Goldman Sachs, Morgan Stanley and Barclays, said that services will be at risk without some sort of transitional agreement.
"Europe's key economic sectors currently have little clarity on the scale, scope and timescale of the eventual Brexit deal. The process is likely to be particularly challenging in wholesale banking, given the high concentration of Europe's market capacity in the UK and the high share of cross-border business currently conducted from a UK base," the AFME paper said.
"Affected market participants and supervisors will clearly need more time to prepare effectively for Brexit than the two years provided for by the Article 50 process."
It cited a study conducted for the lobby group by PwC which suggests that "a further three years will be required to adapt" following the completion of the two-year negotiation period, adding that it will be "vital" to give an early indication of whether a transitional arrangement can be struck as part of exit negotiation.
The lobby group is pushing for a two-phase process which includes a short-term "bridging period" that will run until a new trade deal is struck between the UK and EU, followed by an "adaptation period" that would allow for "phased adjustment" to the new trade deal.
The report's recommendations work under the assumption of a hard Brexit, after Theresa May confirmed that the UK will give up access to the single market.
The move will effectively revoke passporting rights that allow financial services to conduct business across the block without applying for separate licenses.
AFME chief executive Simon Lewis said: "Financial stability and market efficiency must be safeguarded during the Brexit implementation process and thereafter. These are essential 'public goods' for the European economy.
"Given the tight Brexit timescale dictated by Article 50, market participants and regulators are already having to consider important decisions amid considerable uncertainty."
HSBC is on course to move 1,000 jobs from its London office to France where it already has a full service universal bank after buying up Credit Commercial de France in 2002, while insurance giant AIG announced that it would shift a string of executives from London to head-up its own new EU site in Luxembourg.
Insurance market Lloyd's of London also announced last week that it would be setting up a subsidiary in Brussels to secure its EU business.
The AFME report said policymakers need to stay in close contact with businesses that are drawing up relocation plans to make sure that financial market activities continue without disruption.
"Banks which currently use the UK as a hub generate around 60% of total capital markets revenues in the EU, but have an estimated four-year transformation period ahead," it said.
"With an inadequate implementation period, part of the market capacity which these banks provide could be at risk," the report added, meaning that banks could struggle to offer the same level of support for services like trading in derivatives, foreign exchange, stocks and bonds.