UK BANKS COULD WITHSTAND THE LOSS OF SO CALLED PASSPORTING RIGHTS SAYS CREDIT RATINGS AGENCY
British banks would be able to deal with the loss of “passporting rights” in the event of a so-called hard Brexit and continue to operate across the European Union, according to Moody’s Investors Services.
The credit ratings agency said in a report that the direct impact of a hard Brexit is likely to be “modest”.
“The greater impact would be felt through higher costs and diversion of management attention, as the companies concerned restructure, reducing profitability for a time,” it said.
“This is credit negative, but manageable. And other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se.”
Moody’s also said that an incoming EU “equivalence” directive – the Markets in Financial Instruments Directive II (MIFID II) – will give non-European Economic Area (EEA) financial institutions the ability to operate across the EU, essentially nixing cross-border restrictions.
“While the concept of equivalence is largely untested, these provisions may allow global investment banks, whose European operations are typically heavily
London-centric, to maintain their access to rest of the EU,” Simon Ainsworth, a senior vice president at Moody’s said.
This would apply to firms offering services like investment advice, portfolio management, sales of derivatives and other investment products, and market trading in areas like foreign exchange.
“These provisions should also ensure that EU banks can operate in international capital, and money markets which are largely based in London,” Mr Ainsworth explained.
MIFID II is set to come into effect in January 2018. In order to qualify as a third party through MIFID II, the European Commission must deem the country’s regulatory standards as equivalent to those in place across the EU.
It is likely that the UK would qualify, given that the Financial Conduct Authority is continuing to apply EU rules up until parliament and the ruling government officially start the process of leaving the EU.
But some banks are likely to leave before MIFID II and third party passporting rights are fully implemented.
“In any event, it is likely that some banks and other financial services companies may choose to move some UK-based activities to the EU before the
UK’s withdrawal negotiations are complete, given the uncertainty of the outcome and the timing or impermanence of any equivalence decision,” Mr Ainsworth explained.
Moody’s report comes after comments from Bundesbank president Jens Weidmann, who said that Britain would have to remain part of the EEA to maintain passport rights.
Mr Weidmann told the Guardian: “Passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area.”