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Western EuropeNovember 1 2016

What can a post-Brexit UK can learn from Switzerland?

At Sibos 2016 in late September, The Banker chaired a frank discussion of the challenges and options faced by the UK as it prepares to leave the EU, and whether it could take a leaf from the Swiss book. Dan Barnes reports.
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Post-Brexit lessons from Switzerland embedded

The UK is to quit the EU as the result of the June 2016 referendum which saw a majority of 52% vote to leave the bloc.

At the Sibos conference on September 29 2016, Brian Caplen, editor of The Banker, hosted a debate on the macroeconomic and political issues that now face the UK’s financial services community. The conference in Geneva was an opportunity to gather an expert panel of Swiss, German and British industry leaders to debate what the UK could learn from the Swiss experience of a European country that operates outside of the EU.

Swiss-UK comparison

Mr Caplen opened by asking Sindy Schmiegel Werner, senior management member at the  Swiss Bankers Association, if the Brexiteers’ positive comparison between the UK and the Swiss position, with the potential for a bigger financial centre and greater sovereignty, stood up as a case. She said there were considerable differences in the positions.

The panel 

  • Brian Caplen, editor, The Banker
  • Michael Cole-Fontayn, executive vice-president and chairman, Europe, the Middle East and Africa, BNY Mellon; board member of the Association of Financial Markets in Europe
  • Tim Skeet, senior adviser, International Capital Markets Association
  • Sindy Schmiegel Werner, senior management member, the Swiss Bankers Association 
  • Dr Martin Maurer, CEO, Association of Foreign Banks in Switzerland
  • Jan Schildbach, director and head of banking, financial markets and regulation, Deutsche Bank Research  

“Switzerland has always been outside of the EU and it has managed over time to conclude 120 to 150 bilateral treaties, while the banks have managed to find a way to cope with that situation,” said Ms Schmiegel Werner. “Switzerland and the EU are today at a point where the relationship has to be further developed.”

Martin Maurer, CEO of the Association of Foreign Banks in Switzerland, noted that there was no simple comparison, given the significant number of deals Switzerland has with the EU and the debate around immigration that was a major part of the UK’s referendum debate. 

“We are closer to the EU than many think because we are not an EU member,” he said.

Equivalence regime 

Another case being promoted is that under a ‘hard’ Brexit – which means no access to the single market and possibly not the customs union – financial firms could use the equivalence regime that exists under the incoming reform of the Markets in Financial Instruments Directive (MiFID II), in order to provide access. However, Michael Cole-Fontayn, the executive vice-president and chairman, Europe, the Middle East and Africa, BNY Mellon as well as a board member of the Association of Financial Markets in Europe, dismissed this.

“If you want to take deposits or extend loans, MiFID II doesn’t do anything for you,” he said. “If you want to be a broker dealer originating bond issues or structuring capital markets debt with distribution of that within Europe, then a MiFID II licence may allow you some concept of being an introducing broker.

“You need to go member state by member state to put together a patchwork of access that would be substantially less than the passporting arrangements that currently exist.”

With the Bank of England estimating that there are 5500 financial services companies in the UK passporting out, but 8000 EU companies passporting in, it is arguably beneficial for the EU to come to some kind of agreement on this.

Tim Skeet, a senior adviser at the International Capital Markets Association, said: “The key question for London is what will the US investment banks do, where will they go and indeed where do the big Swiss banks that have enjoyed passporting out of London go?”

He noted senior figures in Frankfurt expect some 10,000 top-end well-paying jobs to migrate to Frankfurt, which they believe will be great for Frankfurt in the short term but terrible for Europe in the long term.

“That sums up the danger: that we may have a migration into this ‘phoney war’ period, where banks will have to make plans to do something on the basis that equivalence might not work and passporting might not be forthcoming,” said Mr Skeet.

Serious repercussions

As a comparison with the UK, Jan Schildbach, director and head of banking, financial markets and regulation, at Deutsche Bank Research, cited the example of Québec, the Canadian province that decided to establish French as its sole business language in 1974. Mr Schildbach said there was a big shift from Montréal in Québec to Toronto in Ontario in the 1970s and 1980s, with a number of large companies, among them the Royal Bank of Canada, the Bank of Montréal and insurance company Sun Life, moving their headquarters.

“A hard Brexit might have serious repercussions for London, with a real shift and relocation of resources,” said Mr Schildbach.

A major difference between Switzerland and the UK is the type of business reflected in their financial centres. A lot of Swiss business comes from private banking and wealth management, which face different European regulations to UK businesses, which has a greater level of corporate and institutional work.

Mr Caplen said: “My understanding is that for Switzerland even high-net-worth individuals get caught up in retail legislation. Do you think in that sense that Switzerland's problems are actually worse than those in the UK?”

Ms Schmiegel Werner said: “Yes, that is the reason why I am constantly saying we need to improve our market access. Twenty-five percent of all wealth management is cross-border worldwide.”

That point was picked up by Mr Skeet, who noted that EU business made up approximately one-third of the City of London’s revenue, making it in the mutual interests of both the UK and EU countries to find a pragmatic solution to the situation.

“Unfortunately, politics intervenes,” he said. Jobs going from London to elsewhere do not bring efficiency he added, and in fact would increase costs. “You still can’t fire anyone in Paris and in Frankfurt, it’s difficult, whereas in London you can give five minutes’ notice,” he said.

Inflexibility worries

A clear political issue for the UK appeared to be the lack of flexibility in the EU’s negotiating stance, Mr Caplen observed. It is also exceedingly complex for the European Commission, the European Council and the European Parliament to negotiate, Mr Cole-Fontayn added, as collectively they need to develop a construct that is going to be positive. With 500 million citizen savers and investors, who are either current or future pensioners, the need to be protected encourages political conversations to defend their wealth.

“The real agenda here is jobs and growth,” said Mr Cole Fontayn. “Financing jobs and growth is absolutely essential. The banking system in Europe is under exceptional pressure and we need more sources of finance in Europe. The capital markets union is even more important yet, as I have been told by various members of the European Parliament, trying to explain it in the streets, towns and villages of France, Germany and Italy is actually impossible.”

The idea of ‘seizing the moment’ with further integration as proposed by certain European politicians as a response to the referendum within the EU was roundly dismissed by panellists.

“It seems to me rather that we are struggling to hold the whole piece together and it is actually quite difficult at the moment to achieve more integration,” said Mr Schildbach.“I guess we will struggle in a sense in the EU to come up with good proposals, reasonable solutions and to agree on them without the British.”

European challenges

There are many smaller events that market observers need to keep an eye on, said Mr Cole-Fontayn, including the referendum in Hungary on migration targets and the strikes by the women of Poland in late September 2016.

“This is a quarter end for the Polish financial services industry and if you think that somewhere in the order of 60% of the Polish fund administration market is serviced by female workers in Poland, withdrawing their labour and going on strike at the quarter end is going to create some challenges with the calculation of net asset values for the fund management industry,” he said.

Although these two events are individually relatively small, Mr Cole-Fontayn said they are indicative of the challenged intentions in the EU at the moment in various member states.

Moreover, French and German elections in 2017 create a huge potential for change over the next year. The elections will happen with the electorate knowing that Article 50 is likely to be triggered by the UK in March that year.

Escape to New York?

An audience member also raised the deal between the London Stock Exchange and Deutsche Börse as one area of concern. Would companies start to list in the US even more than they do at present if Europe was offering a more fragmented liquidity pool? What would be the possible impact on Swiss, European or UK business as a result of the lost secondary market activity?

Mr Skeet said the capital markets business was one of the great success stories of Europe and that while business was routed via London, it was between different European countries. Mr Caplen noted that was also done before the single market.

“Absolutely,” concurred Mr Skeet. “What happened was, as all of the regulations started to fall into place, it was made a little bit more difficult at the periphery, but fundamentally it continued and got better. Europe has actually allowed something to grow that works phenomenally well, and that’s why the question of how can we make the possibility of unwinding it sensible is what we really need to debate. That’s what we are struggling with.”

Answering the question more directly, Mr Cole-Fontayn said: “French nanotechnology companies will go to the capital markets and list on the exchange that gives them the best valuation and that’s now called the New York Stock Exchange. Absolutely that will happen.”

He added that global banks have been doing business in Brazil, China, Russia and India for the past 20 years, and are well aware of how challenging that can be, but also know what the possibilities are.

“A global financial institution is exactly that. It can source business in Brazil and conduct it in the US; it can facilitate business between Japan and China; it can facilitate business between the UK and India. That’s going on today and more of that will go on,” he said.

SME help

Small and medium-sized enterprises need help to do more cross-border business, he said, as it is incredibly expensive, making it hard for those enterprises to operate as effectively and efficiently as they could.

“The optimistic side here is that the UK will rediscover what it means to serve and redevelop and rediscover a service culture, and I think there will potentially be a significant increase in British productivity because we will find that it will be harder to do business in Europe,” he said. “Therefore, we will have to roll up our sleeves and get on and not only continue to find ways of trading with Europe, but we are also going to have to have an enhanced value proposition.”

Mr Caplen noted that Switzerland has a trade deal with China, and asked how that was working in supporting financial firms. Ms Schmiegel Werner said the trade was by banks with representatives in Beijing or Shanghai, and the details were more for banks to operate locally than to make trade easier as a result of the deal.

Mr Maurer said: “If you have a hard Brexit, I guess the Swiss experience is not very healthy for you.”

New relationships

Mr Caplen asked Mr Skeet whether or not the break from the EU could mean the UK building new relationships with countries such as India or China.

“Well, yes, because we will have no choice,” he replied. “I would only observe that in a world dominated by people such as [US presidential candidate Donald] Trump that we are potentially looking at a more protectionist and intra-guarded world, which is going to make the challenge even harder for the UK.

“That said, we have got London with 2000 years of history as a great trading centre, and there is no reason to believe that we can’t continue to be a very open and outward-looking trading centre.”

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