Moody’s: City firms will manage without passporting

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The City of London’s financial services firms will manage the loss of passporting even though it would be negative for the UK economy as a whole, Moody’s Investor Services says in a report released today.

If the UK loses all passporting and recognition rights, sales, trading and middle office staff would have to be shifted to the EU, along with capital, liquid assets and IT infrastructure, Moody’s says.

Ucits and other asset management functions were listed as activities that firms would have to restructure on the loss of passporting rights, alongside Euro clearing and settlement.

“The area of asset management may be most negatively impacted due to explicit location requirements for managers of Ucits compliant EU funds,” the report states.

The report says implications of equivalence would be “more significant” for the asset management industry than investment services and banking.

‘UK Ucits would no longer be eligible for distribution in EU under the passport arrangements provided by the Ucits directive. Instead, they could only be marketed under the national private placement regimes of EU member states.”

Moving operations would likely be manageable in terms of credit fundamentals, absent any other shocks, Moody’s says.

It points out UBS already operates a subsidiary in Germany, which includes asset management activities, while Citigroup conducts EU banking through an Irish subsidiary.

“These firms, like others, are likely to be able to build upon their EU-domiciled franchises to service their EU clientele,” the report states.

“However, relocating personnel and operations will provide executiion challenges and the ultimate operating structure is unlikely to be as efficient as the current one, with a critical mass of functions located together in London.”

It added financial services firms were likely to move services to EU locations before negotiations due to uncertainty.

Moody’s says higher costs and diversion of management attention during restructuring would hit profitability and would be credit negative, but would be “manageable”.

The report said EU firms servicing UK clientele would face fewer demands for reconfiguration, however, the impact would be greater if they currently operate through branches rather than subsidiaries.