On June 23, the UK will hold a referendum to decide whether to leave the European Union (Brexit). Partners from Hogan Lovells gathered on May 10 to discuss the issue in a roundtable event titled What could Brexit mean for US financial institutions? held at the firm’s New York office.
During the event, speakers explored all angles of the debate, considering both the opportunities and risks for US financial institutions. The firm is neutral with regard to the UK referendum.
One theme was clear from the discussion: regardless of how the outcome of the referendum, US financial institutions can expect a number of shifts in both the UK and EU environments, which can only impact the US.
“Although it may seem the Brexit issue is far removed from our shores, the financial markets are global. We will need to address how Brexit or the UK's new deal with Europe might change the operating models of US institutions,” said Lewis Cohen, partner at Hogan Lovells, at the event. Either eventuality, whether the UK stays in or leaves the EU, will present both risks and opportunities for the US.
Risks and opportunities
In the event that the UK leaves, there could be opportunities for US financial institutions.
“Brexit would potentially hit the UK's attractiveness as a destination for international finance, which could allow New York to step ahead of London,” said Richard Schaberg, partner in the firm's Washington DC office.
But at the same time, there are risks. For one, if the UK left, US financial institutions would continue to do business in Europe. Without the UK as a port of entry, the costs of Brexit for US financial institutions could be significant.
“If passporting is no longer available, US financial institutions would probably look to turn a European office into a separate entity, instead of their current UK entities, to access the EU passporting regime,” said Rachel Kent, partner in Hogan Lovells London office.
- A roundtable event at Hogan Lovells has explored all angles of the Brexit debate;
- Regardless of how the UK votes, US financial institutions face changes in the UK and EU;
- Brexit risks include a damaged CMU and costs involved in US firms relocating to the EU;
- Brexit opportunities might include an enlarged financial services sector in the US;
- With either outcome, US regulatory work, and general uncertainty, will grow.
“This creates a time risk, as this could take up to two years, and a cost risk in regulatory capital,” Kent said.
As such, there is already much Brexit-related activity in the US.
“US regulators are asking if the US banks have contingency plans for their US operations, but it is not a formal request, so there is now a burgeoning risk assessment going on at US financial institutions,” said Schaberg. US financial institutions should also consider how a UK exit would impact the remaining EU. Were Brexit to occur, US financial institutions would be left facing a much reduced Europe.
“Europe is in a fragile state and there has been increasing commentary regarding the damage an exit from the Union could cause,” said Sharon Lewis, partner at Hogan Lovells at the event. “Much like a divorce, one never knows if it will be handled amicably.”
Many of these commentators have focused on whether other, smaller member states might follow the UK and leave the EU. But there would also be more immediate, market-based impacts.
Capital markets union
Capital markets union (CMU) is the EU’s flagship economic policy designed to boost growth by developing capital markets in the EU’s traditionally bank-reliant financial system. Much of the success of this project, it seems, rests on the involvement of UK expertise in capital markets. A British exit from the EU could therefore damage CMU.
“CMU is nascent, so there would be a likely set-back to its progress towards creating a uniform and robust capital markets system,” said Cohen.
We will need to address how Brexit or the UK's new deal with Europe might change the operating models of US institutions
And setbacks would also come in the form of uncertainty. “There are suggestions that negotiation of an exit could take two years or more, this would generate uncertainty to be felt across the capital markets,” said Cohen.
At the event, partners from Hogan Lovells explained how much of what surrounds Brexit is uncertainty, in politics and markets both.
“There's real uncertainty in the market at the moment, we have already seen deal flow slowing as people await the referendum result,” said Kent.
That uncertainty, it seems, will not be going away. Speakers were keen to stress how the UK-EU relationship will change, regardless of how the UK votes on June 23. In part, this is the result of domestic political environment in the UK.
“Whether there is Brexit or not, there is still a mood for change in the UK,” said Rachel.
According to Kent, there are also practical issues to consider. In the run up to the referendum, the UK renegotiated the terms of its EU relationship with Brussels and other EU Member States. These changes will, regardless of the referendum result, require immediate attention in both the UK and EU.
“David Cameron has negotiated a new settlement with Europe, so there will be issues around the implementation of these changes regardless of the Brexit vote,” Kent said.
And in the same spirit, the UK referendum will change the outlook for US financial institutions, regardless of how it goes.
“There is bound to be a flow of legal and regulatory work after the Brexit vote, whether the UK is out or in but on their revised terms,” said Schaberg at the event.
“Hogan Lovells expects to see clients in the US and Europe asking for support as they navigate issues we have not encountered before,” he said.
The Hogan Lovells event What could Brexit mean for US financial institutions? was chaired by IFLR’s Americas editor, Edward Price. More information on the event can be found here.
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