The City of London will “without question” face a loss of business as a result of the UK leaving the European Union, says Bank of England governor Mark Carney.
Speaking to the Treasury Select Committee about the impact of the EU referendum, the governor says that if the UK were to leave the EU and did not get a mutual recognition treaty to replace the current passporting regime then companies would leave the UK.
He says a number of company chiefs have spoken both publicly and privately about their contingency planning for a Brexit scenario, particularly if the UK had a ‘third-country’ setup with the European Union, which would not give them passporting rules.
Carney adds that the cost of doing business for financial services firms would also increase as a result of the UK leaving the EU.
The cost of compliance for firms with a presence outside the UK would rise as a result of complying with two regimes, he says.
“If a firm is purely domestically focused one could expect a scenario where compliance costs could go down. If a firm has an element of activity that extends from the UK to another EU country then compliance costs would be expected to go up, as they will have to fulfil compliance responsibilities in both jurisdictions,” he adds.
If passporting abilities were lost there would be another cost for financial services firms of setting up subsidiaries in the EU, Carney says.
“There is a possible scenario in the loss of passporting rights in the cost of establishing subsidiaries if a firm did not already have one, including potentially in the application of ensuring that mind and management is resident in those subsidiaries that would add to the costs of compliance and doing business,” he adds.
The ability for firms to passport into Europe is one factor that makes basing a financial services business in the UK attractive, adds Carney.
“There is a reason why a substantial proportion, more global banks, more internationally active banks are headquartered in London than any other European country, or all other European countries combined.
“That’s partly because of the cluster of expertise that is here but also, in many cases, and I have had numerous conversations with CEOs who affirm this, that is because of the passporting ability of this economy in terms of the activities.”
However, speaking at the start of the session, Carney says nothing said in the meeting “should be interpreted as making any recommendation” on which way to vote.
Also speaking to the Treasury Select Committee, deputy governor of the Bank of England John Cunliffe says that it would be a “very big negotiating ask” to leave the EU and still be part of the single market and have an influence on the rules and regulation made.
“A negotiation like this has never happened before, we are in unprecedented territory. I would think once we are outside of the EU and if we wanted to remain in the single market for financial services it would be a very big negotiating ask to also have the influence on setting rules we have at the moment,” he adds.
Speaking about the additional liquidity measures announced by the Bank of England today surrounding the EU referendum vote, Cunliffe says the Bank has learnt from the Scottish referendum that such announcements need to be made early.
“The lesson that we learned in the Scotland case is that if you leave it until quite late to decide whether to put these things in it can be difficult to do it and it can create instability by the announcement itself,” he says.
“There is uncertainty around what happens if the UK leaves the EU and we know there will be a period of uncertainty that will extend for some time. It is perfectly possible that people will want to protect themselves form possible downsides and we could see moves in currency rates and in risky assets as people try to work out what the outcome of the process would be.”