Exclusive: Lords Brexit committee to highlight need for financial institutions to make strategic decisions before EU negotiations are finished

Tens of thousands of banking jobs could be lost to continental Europe from next year if ministers do not agree a transitional deal on single market access with the EU, a Lords report on financial services after Brexit is expected to warn.

UK naive to expect easy ride in Brexit trade talks, says Lords report Read more

Peers on the committee, due to report on Thursday, have been struck by the urgent need for financial institutions to make decisions on their location because they cannot wait until the end of Brexit negotiations in 2019 to find out if they can trade in the single market from London.

The committee has been given a range of estimates of the likely job losses across the financial services sector including a claim from Ernst and Young, commissioned by the London Stock Exchange, that 200,000 UK jobs are at stake.

The Brexit committee, one of several that has begun looking at the impact of the UK’s planned departure from the EU, has been warned that big banks will start making decisions next year, partly because the relevant financial arrangements take a year to unwind.

Banks believe they need clarity on the UK’s trading relationship with the European Union long before the end of article 50 negotiations are due to be completed by the spring of 2019. They fear it could be necessary to relocate from London as soon as possible without transitional arrangements to ensure access to the single market post-Brexit.

It is already becoming clear that a dividing line is developing between those ministers who think the complexity of the negotiations mean it is not possible to negotiate a new trading relationship with the EU by autumn 2018, requiring a transitional agreement, and those who think it is feasible simply to leave the EU and then trade with the EU on World Trade Organization terms.

Philip Hammond, the chancellor, became the clearest cabinet exponent of a transitional agreement on Monday, saying that “thoughtful politicians” increasingly agreed on its importance. However, other ministers, such as the Brexit secretary, David Davis, have said they are more relaxed about the issue.

“Passporting” rules currently allow UK-registered financial services firms to sell their products and services throughout the EU without needing to set up a local subsidiary, as well as allowing European banks and fund managers to work freely in London.

Much of the evidence from financial firms heard by the Lords committee called for the certainty of transitional trading arrangements between the UK and EU to allow complex negotiations be carried out.

The Association of British Insurers told peers that an early agreement on a transitional phase was needed since this would “provide the option for the firms most affected by Brexit not to take swift decisions in 2017 on scaling back”.

Philip Hammond says post-Brexit transitional deal will be needed Read more

This would require either the UK or the financial services sector to continue paying contributions to the EU in return for access to the single market. Senior Tories, including the former Cabinet Office minister Oliver Letwin, have acknowledged that the insurance retail industry is a special case and fees will have to be paid into the EU if firms are to be allowed to provide services.

Committee members have also been struck by warnings from the London Stock Exchange Group chief executive, Xavier Rolet, that the article 50 negotiating process would make it hard to secure the smooth transition that he wanted.

Rolet told the inquiry: “Article 50 was designed with exactly the opposite set of objectives in mind; that is, to impose and enforce such a reduced timeline to raise the cost of exiting the EU and make it punitive, or to create a level of uncertainty. This is our number one concern.

“If our customers are faced with an uncertain outcome within, say, the next two-and-a-half years, for the protection of their own customers and shareholders they are likely to have to start today to think, plan and execute alternative arrangements.

“The real difficulty is that for most financial securities and licences, the delays in securing a licence easily exceed a year; 18 to 24 months is the norm, particularly since in most cases the regulatory environment in Europe is less global, sophisticated and deep than it is in the UK. So the ability to process multiple applications takes time.

“It is about ensuring that our customers will not be in a situation in the next two years where all of a sudden they have large amounts of risk or activities that are non-compliant.”

The Lords report on financial services is the fourth and probably the most important in a series of agenda-shaping reports from peers that will inform the first phase of the detailed debate on Brexit.

Pressure is mounting among business leaders for more clarity from the government on how much time they may have to adjust to a new trade regime, with many warning that a transition phase is only useful if the long-term policy direction is clear.

Views are mixed in the City on the likely impact of a hard Brexit. One senior commercial banker described the loss of passporting rights as an “embuggerance” – British military slang for an obstacle in the way of progress – rather than a catastrophe and was more worried about future access to skilled European employees. Some in fund management and insurance are more concerned, while others predict some loss of clearing jobs to rival European centres is inevitable.

At a meeting between car manufacturers and Davis on Monday, attendees were said to be heartened that the government increasingly understood the need for them to retain access to European markets but were worried there was little plan for achieving this.

Instead, many are now approaching the point where they are having to contemplate the worst-case scenario where departure from the customs union devastates their complex cross-border supply chains.

“New products can take years to develop, so we need to know soon how we are going to get them to market,” said one industrialist present at the automotive summit in London, who was sceptical of the “vague assurances” already provided to manufacturers such as Nissan.

They also warned Davis that their factories often “just have a few hours of parts” stored in inventory due to just-in-time supply chains, so new paperwork hurdles and tariffs would be devastating.

Similarly, in the City, bankers report that almost every firm they know is making contingency plans, with varying degrees of irreversibility. There is growing scepticism that “passporting” rights for financial services products can be protected.

“It looks increasingly like a hard Brexit is inevitable,” one leading UK commercial banker told journalists at a private lunch on Monday. “Unless they can find a way to avoid this, a transition phase might only delay the pain.”