If you thought Brexit was either going to be endlessly deferred or so soft and cuddly that Britain's banking industry escaped almost unscathed, you were wrong. In an interview at the weekend, British prime minister Theresa May made it clear that there can be no compromising on immigration. With no compromising on immigration, there can be no continuation of Britain's unfettered access to the European Economic Area. And with no continued access to the EEA, there can be no perpetuation of the passporting regime that allows banks in London to work with clients in the EU and vice versa.
As a result, a 'hard Brexit' with the potential to turn into a 'very hard Brexit' looms. What is a hard Brexit? Raoul Ruparel, co-director of Open Europe, defines it as agreement of only a minimal trade pact with the EU. By comparison, Ruparel defines very hard Brexit as the UK having minimal interaction with the EU and operating instead under World Trade Organization (WTO) rules. In terms of the City of London, a hard Brexit means adopting "equivalence". Banks operating in London will only be able to access EU markets if the UK's financial services regulations are deemed (by the EU) equivalent with the EU's (Unfortunately, the EU can decide they're not equivalent at any time). In City terms, a very hard Brexit means no equivalence and therefore no access to EU markets at all (given that the WTO doesn't cover financial services).
Needless to say, Boris Johnson continues to champion the notion that Britain hard Brexit is meaningless and that Britain can negotiate a bilateral trade deal with the EU that will allow access to the European single market whilst imposing immigration restrictions. In Johnson's terms, something along the lines of BAML's 'equivalence plus', with migration limits, might be ideal.
However, as Politico's Francesco Guerrera points out this morning, triggering Article 50 before the end of March 2017 makes a nice bilateral agreement more unlikely than ever.
It will be very difficult for the UK to negotiate with France ahead of the French elections (due in April or May next year). It will also be very difficult to negotiate with Germany ahead of the German elections (due before October 22nd 2017). If a negotiated exit and bilateral deal is what May wants, she should be triggering Article 50 as late as possible after building support among the EU's 27 members.
"All 27 of the EU's members need to agree to a bilateral deal in the EU Parliament," points out Graham Bishop, a consultant on the financial services industry and the EU. "It's absurd daydreaming to think they'll agree to something unless they can see what's in it for them."
So, what is in it for the EU if London remains the Union's financial hub? This isn't clear: attempts by the City of London to scare the EU into supporting its continued preeminence backfired last week. EU companies said they don't need London for liquidity: they can just as easily access capital markets elsewhere.
Absent a bilateral agreement, a very hard Brexit looks likely. Bishop says May's talk about reclaiming sovereignty is hard to reconcile with an equivalence regime: "You can't exactly say we've voted leave and 'taken back control'."
Guerrera points out that equivalence will be difficult to maintain if the British government has the ability to tinker with EU rules using statutory instruments, something which the editor of politics.co.uk says is possible under May's repeal bill.
With no passporting, no bilateral agreement and no guaranteed equivalence regime, the City of London is in for a very hard landing.
How hard? Last week, Credit Suisse CEO Tidjane Thiam told Bloomberg that just 15% to 20% of the volume in Credit Suisse's London-based global markets business is dependent upon unfettered access to the European Union. If volumes are aligned to jobs, the implication is that "only" around 700 of the remaining 4,750 jobs Credit Suisse has in London would be in danger of disappearing.
This may be wishful thinking, however. Trading volumes and banking jobs are only loosely correlated. Viswas Raghavan, deputy chief executive officer for Europe, the Middle East and Africa at J.P. Morgan, also said last week that a messy Brexit which doesn't allow for a long transition period when banks continue to have access to the European Union under current terms will lead to "pandemonium." In July, Boston Consulting Group estimated that 80,000 finance jobs in London could be at risk if Brexit is inexpertly navigated.
After conducting a detailed study with consulting firm Oliver Wyman, the CityUK is due to release an update on the impacts of Brexit on banking jobs this coming Wednesday. In the meantime, it might be worth you revisiting the chart from Boston Consulting Group below - and thinking very seriously about your future in London if you job is towards the right. "If you're a bank in London with very large systems and you know you're going to need to move them within two years from March 2017, you're not going to wait around," says Bishop.