Central Bank warns against post-Brexit ‘race to bottom’ for banks

Financial firms must not base a decision to move from London after Brexit on expectations of being less heavily regulated, a senior Irish regulator said on Thursday.

Sharon Donnery, deputy governor for central banking at the Central Bank, said her office was receiving many inquiries from UK-based financial firms about relocating to the Republic.

Banks, insurers and asset managers based in London offer their services across the European Union under the European Union's passporting rules but this is expected to end in 2019 when Britain leaves the EU.

Ms Donnery said many factors influence a decision on where to relocate, and there must be no “race to the bottom”.

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“While tax and regulation do matter, the significance of these dimensions... also mitigate against any race to the bottom,” Ms Donnery told a Chatham House event in London. “This is a particularly important factor for me in my capacity as a regulator, to ensure that location decisions are not seen as being based on regulatory arbitrage.”

Standards

She said rigorous regulatory standards were also an important part of this debate, and the European system of financial supervision should ensure uniformity in the application of the rules.

“We’re confident that location decisions will indeed be based on issues such as infrastructure, skills, legal framework and so on.”

Dublin and other financial centres such as Paris, Frankfurt and Luxembourg are jostling to attract financial firms from London, given the prospect of extra tax revenues.

Ms Donnery said London could not take its pre-eminent financial centre role for granted after Brexit as history showed that the fortunes of financial centres like Venice and Amsterdam in past centuries fluctuated. “The role of London in future will depend on the agreement between the UK and EU, and also depend on how London positions itself,” Ms Donnery said.

Very damaging

A “hard Brexit”, meaning no deal on UK access to the single market for financial services, “could be very damaging”.

“In my own view, London will remain an important financial centre regardless,” she added.

However, the “new London” may not benefit from the “agglomeration” effects to the same extent, Ms Donnery said, referring to the clustering of financial, legal, accounting and other related services.

She said Ireland has been approached by financial firms in the UK from across the sector, but the discussions remained largely exploratory. Many of the firms were waiting for the triggering of article 50, due next week, to start formal EU divorce talks.

– Reuters