If you work in finance in the City of London, your job is now in the hands of the lawyers. It's no coincidence that banks pre-booked law firms ahead of the referendum result. Nor is it any coincidence that the European Banking Authority's page on the "passporting and supervision of branches" crashed on Friday. Everything now hinges upon whether activities that take place in a City within the EU will remain authorised in a Britain that's without - and whether banks in London will wait around to find out.
We spoke to the top London regulatory lawyers in the eye of the storm. This is what they said with regards to what happens next.
Different lawyers have differing opinions on the speed with which things need to change. Jonathan Herbst, global head of financial services at Norton Rose Fullbright and a former head of European law at the then-Financial Services Authority, says legally nothing need change immediately: "The legal position is that until the end of the notice period (at least two years and given that the UK notice to trigger the whole process looks unlikely to be served for a while it could be a lot longer) nothing happens – the passport carries on as is."
The legal situation is not the same as the practical situation, however. Arun Srivastava, head of Baker & McKenzie's Financial Services Group in London, says it makes sense for banks to start planning for a "less favourable outcome" in which the existing passporting arrangements used by banks in London to operate across the EU are scrapped. The lead time for setting up a fully licensed subsidiary in mainland Europe is long. Therefore, Srivastava says it makes sense for banks in London to set up branches overseas using the current passporting agreements and then converting those branches into fully authorised EU firms later if necessary. In the worst case scenario, jobs could therefore move out of London into a new and beefed-up European branch network.
Justine Sacarello, head of legal and regulatory change at a British bank in the City, says the UK government is likely to seek, "alternative treaty frameworks" to preserve the benefits of passporting under the single market. It would make sense to use existing legislation such as the "third country regimes" under MiFID II, she adds. These say that countries with 'equivalent' regulations will be able to access the single market.
However, Rachel Kent, a partner at Hogan Lovells and head of the global financial institutions sector at the firm, says there are "various difficulties with the third country regime," which can be patchy. Relying upon the "third country regimes" will tie the UK to EU financial services regulation for the indefinite future and brings its own uncertainties, says Kent. "Given the difficulties, firms may well feel the need to restructure their businesses now in case there is no other complete solution." she concludes.
Lawyers warn that much depends upon local regulators. It's one thing for banks to shift a few people into existing overseas branches and subsidiaries. It's another thing for local regulators to accept a rapid up-scaling of activities in their jurisdictions. This could delay the movement and jobs and businesses and act in London's favour.
Which banking and finance jobs will need to migrate? Again, lawyers' opinions differ.
Simon Gleeson, a partner in banking and finance at Clifford Chance, says it's likely that "coverage roles" will have to move, along with "middle and back office roles relating to Euro clearing and settlement." It's a more open question whether trading will need to move, he adds.
Peter Snowdon, a financial services regulatory partner at Norton Rose Fullbright, says an end to passporting will affect sales and trading roles where individuals interface with clients in the European Economic Area (EEA): "Those clearly have a direct interface with EEA-based persons." Back office jobs like clearing and settlement could also be affected, he predicts.
However, Herbst cautions against leaping to conclusions with regards to sales and trading. "Much of that business doesn't involve EU clients," he says, suggesting that the easiest way to think of it is by comparison with the US. - "Many types of business with EU counterparties already take place from New York directly (or Singapore etc). The rules are complicated, but in the electronic age the idea that if you do not have automatic rights to do cross border business into a country, you have no business is simplistic. For example, it is often the case that if institutional business “comes to you” rather than being solicited."
Srivastava also offers hope to traders who want to stay in London: "An alternative might be to set up a smaller sales operation within the EU with business being booked to London," he suggests.
At the very least, Kent says banks will need to locate senior management in any fully licensed subsidiary situated in mainland Europe. From there, she says "a significant portion of its business could be outsourced or delegated to London."
Sacarello points out that the end of passporting has big implications for the asset management industry as well as banks. Like banks, asset managers have been able to establish hubs in London and passport into the EU. In the absence of these arrangements, they will, "no longer distribute their funds or to provide cross-border managed account and investor advisory services." In other words, asset management jobs could move too.
Deutsche Bank employs 7,000 people in London using a branch licence from its German HQ. So, why can't the UK just say it's fine for Deutsche to keep on operating in London and by implication to keep all its jobs in the City?
Unfortunately, it's not that simple.
Gleeson at Clifford Chance points out that the current regime says prudential matters (ie. capital and liquidity) are a matter for the home state. In other words, the capital and liquidity status of Deutsche's huge London operation is the responsibility of BaFIN and the ECB. Will they accept the continued location of Deutsche's sales and trading business in London if Britain is outside the EU? Who knows. Maybe not.
"Some of the bigger branches in the UK also undertake activity cross-border (ie branch of large German bank in London provides services cross-border to clients in Italy)," says Gleeson. "It is not clear the extent to which they could do this post Brexit,"
The real danger for all banks, European or America, are the costs involved in setting up overseas subsidiaries. For example, many US banks in London are currently operating as "third country firms" rather than UK subsidiaries for reasons of capital efficiency, says Srivastava. In future, they may need to open full subsidiaries either in the UK and or mainland Europe. Capitalising a new subsidiary can be costly, and banks may now find it necessary to have teams of compliance and regulatory staff in London and in Europe.
In a world where revenues were already falling, the cost of doing business has risen, a lot.