Brexit Could Lead to Diversification, Uniform Regs

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Cameron Finch

June 21 — Investment banks would respond to a possible U.K. exit from the European Union by relocating operations to other countries, said Richard Schaberg, head of the U.S. Financial Institutions practice group at Hogan Lovells.

“There will be a big disruption of the activity that is currently taking place, or has historically taken place in the U.K., and it will all eventually leave and have to be housed elsewhere,” Schaberg told Bloomberg BNA in a June 21 phone interview.

Diversification

Regardless of the outcome, financial institutions such as Citibank, Goldman Sachs and J.P. Morgan “will look to diversify their physical presence over time” given the “instability that clouds the U.K. market going forward,” Schaberg said. Even if the British exit—“Brexit”—vote doesn't prevail, U.K. predominance will be affected.

On the other hand, there probably would be “great benefits” for other European countries such as Ireland, France and Germany because a “leave” vote would move market activity away from London-based operations and onto non-U.K. platforms, Schaberg explained.

Passporting

If the U.K. does decide to leave the EU, U.K.-based financial institutions might still be granted limited “passporting” rights, Schaberg said. This model would likely mirror that of Scandinavian countries, which are not EU members, but still have access rights.

A key part of the EU’s financial services regime, “passporting” gives member-state banks the ability to conduct business and sell services throughout the EU without having to obtain a license in each country.

If this happens, “the financial services industry can try to salvage a reason to be in London because it would still have some sort of—albeit limited—continued access into the EU regime,” Schaberg said. However, he said his sense from talking with people in the U.K. is that they believe this to be an unlikely outcome.

If the U.K. leaves, he said, it seems unrealistic to expect the EU to be receptive to maintaining a relationship with the U.K. and making the move advantageous so that the U.K.'s financial industry remains viable.

Common Platform

Another major outcome of the vote could be increased momentum towards a common securities platform within the EU. While there are some commonalities in EU countries' regulations, the EU has been trying to establish a single market since the 1960s.

A disruption in the London market might boost support for uniform securities regulation across the EU, Schaberg said.

However, “the caveat to that is, the uniform securities platform was intended to include the UK,” so a vote to leave the EU would create mixed results, Schaberg said. “On the one hand, it may create a little more of a groundswell for pushing a common securities union forward, but on the other hand, the value of that without the UK is diminished,” he said.

Possible Industries Affected

If Brexit passes, big banking institutions will be immediately impacted due to the loss of passporting capabilities through London to the EU markets.

However, global industries such as life sciences and pharmaceutical companies—which have seen substantial M&A activity recently—will also be complicated by a decision to leave the EU, Schaberg said. Brexit will probably halt some of that activity, he said.

In addition, London's financial technology market may also see some collateral damage. “London has really taken a premier position in being a promoter of fintech development,” Schaberg said. “To the extent that London is no longer a gateway to the EU, perhaps there might be less allure for London as a starting point for fintech development,” he said.

The Brexit vote is set for June 23.

To contact the reporter on this story: Cameron Finch in Washington at cfinch@bna.com.

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.