Banks Likely to Lose Passporting With Brexit, UK Official Says

Global banks will probably lose their current legal rights to provide services in the European Union after Brexit, the U.K.’s trade minister said in the most detailed outline yet of the government’s thinking.

Passporting, which allows London-based lenders and insurance companies to sell their services anywhere in the single market, is unlikely to continue after the U.K. leaves the 28-nation bloc, Mark Garnier said in an interview. He added that an alternative system that’s been floated, known as equivalence, was probably not going to be “good enough” for banks.

Mark Garnier

Photographer: Jason Alden/Bloomberg

Garnier, who is also government envoy for financial services, instead touted a better version of equivalence that might work well for London-based banks. The drawback is that Britain may have to accept all future EU regulations as they are handed down from Brussels, he said. Resentment toward EU bureaucracy and a backlash against immigration were drivers behind the June referendum.

“If we can create a special hybrid version of that, with a better version of equivalence or a different version of passporting, then that’s what we will try to achieve,” Garnier said by phone. “What we are not trying to do is fit into an existing box. We are trying to create a new model.”

Asked if this meant passporting was likely to end but would hopefully be replaced with something else, he said: “Exactly.”

Click here for a guide to what passporting rights mean for banks.

As the government gears up for tough talks with the EU, it’s also facing pressure at home. The opposition Labour Party will push for full access to the single market and resist what it calls a “ Bankers’ Brexit,” the chief voice for economic policy, John McDonnell, will say on Thursday.

McDonnell, who shadows the position of Chancellor of the Exchequer, says the government is favoring financial industries over the needs of manufacturers and small businesses, according to prepared remarks released by his office ahead of a speech in London. The Tories “want to turn Britain into a Singapore of the North Atlantic,” McDonnell will say.

At stake is conserving a key motor of the British economy that contributes about 10 percent of gross domestic product. Finance executives have threatened to move staff out of the U.K. if Prime Minister Theresa May’s team of Brexit negotiators doesn’t secure a deal allowing them to serve European clients from London.

Global investment banks such as JPMorgan Chase & Co. and Morgan Stanley have the most to lose as they operate European business out of London and don’t have the same links to the continent as local lenders such as Societe Generale SA and Deutsche Bank AG. The British Bankers’ Association warned that leading lenders are poised to press “the relocate button” in early 2017.

Garnier stressed that no “hard and fast” plans had been made on what form of deal would be made. With negotiations due to begin before the end of March, pressure has been mounting for the government to provide more clarity, particularly to banks, to avoid a possible exodus of business from the City of London.

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