Peter Snowdon: Hello everybody and welcome to our latest video on Brexit. In this video we are going to take a brief look into what we have been seeing in the market and what we think may be happening in the next new weeks.
Finally firms are beginning to look at what and how things might pan out over the next few months. There is a bit more clarity at least from the PRA about what they expect to see. I mean, the sort of things that you and I have been seeing have been around things like for example, mapping out what EU branches are doing in London.
Jonathan Herbst: I mean there is nothing new in the sense that all firms need to look at all of their business lines in the rest of Europe, what they are doing into Europe and what they are doing from Europe to here and that is for investment firms and banks. Nothing new about that, we have been doing that for a year and really all that is happening is that people’s minds are being concentrated.
Peter Snowdon: Yeah, and it is right to say, isn't it, that what we are seeing with some businesses is they are discovering they are doing more than they realised they were doing and they are going to have to kind of map that out and then translate it into RAO terms and what sort of things do you think arise in that context?
Jonathan Herbst: So a few things. Firstly, one surprise has been the number of areas that actually are not regulated in a number of Member States, so quite a lot of M&A activity being a very good example of that. I think the second area is the extent to which you can still do marketing from here, so the front and back end issues, the extent to which you internalise some of the functions so that the front end marketing is done from another Member State, assuming hard Brexit for a moment, and no special rights. And the third area is areas like either back-to- back trading or the extent to which you have internal outsourcings to the UK. I think those are all of the issues in play at the moment.
Peter Snowdon: And in a sense I think one of the things that we are seeing and just picking up on one of the points you mentioned there, is that banks can almost restructure the way they do business, because if you can funnel it through your home Member State, the seat of your business, you may well find actually you can outsource activity to London and not necessarily be passported.
Jonathan Herbst: So to take a practical example, and lets assume you either relocate or indeed have your marketing people in home country in your example, how much can you actually have in London and it is interesting, the regulators are very aware of this, EBA and the ECB have both brought out papers on you can’t just have a letterbox, there has got to be substance, now devil is going to be in the detail as to how far that needs to go, I mean our sense at the moment actually, certainly in banks and it is true with investment firms as well, but banks are finding they can do quite a lot conceptually behind the scenes and their sales operation may be based in another location buts let’s see, that is all to play for.
Peter Snowdon: And in practical terms, and we were going to have another video in due course on the detail of applications to be authorised for the Brexit world for branches, but there is quite a lot to think about in practical terms and the sorts of planning that you need to do and possible consequences for things like, for example, senior managers regime and whether you are going to have to extend the number of functions in London and so on. What about for the home Member State?
Jonathan Herbst: So just to deal with the senior managers for a moment, yes absolutely, EEA banks need to convert that into third country, that much is clear. For the home state, I think a lot of it is around what can you do into the UK is one very important question because banks will not have the overseas persons exclusion if they are one entity or at least that is I think the better view, as I think there are some tricky issues.
Peter Snowdon: Yes and I think there are two views in the market on that …
Jonathan Herbst: There are two views on that
Peter Snowdon: … but I think it is fair to say that we take the view that it is fairly restrictive in that sense
Jonathan Herbst: Correct. So there are some issues on that, as to how do you do the business from a home Member State into the UK if the UK remains a very important liquidity market, so that is one issue.
Second question is how do you structure the interrelationships, you know the stuff that is going to be in the home state, with what is done in London, so all of those things need to be taken account of.
Peter Snowdon: OK, predictions for this year. I am going to push that one onto you because when we get it wrong I can refer it back to you. I think it is difficult to know, isn't it, we know we have got some structure now for the PRA applications, the PRA expects to see those going in at the beginning of 2018. Difficult to know in practical terms how they are going to manage all these applications, so I am going to start with my prediction to be fair to you, which is I think the process of these applications may well mean that we have got some extension and some sort of understanding in the PRA that there is going to have to be some kind of flexibility rather than this apparently rather hard line they have taken thus far.
Jonathan Herbst: There is a lot of argument for that, partly of course that links through to the transitionals period and of course in one sense it is ironic, one of the fears people have is that these regulatory processes could turn into a kind of year rather than what was going to be a very tight process so that cuts both ways. I think the other prediction I would make is, I don't think it’s any surprise, people are definitely going to need to move some functions in either direction or at least to be more disciplined about their management lines in both places, just like any third country bank or branch, but what is much less clear to me is how much is it all going to mean and any flexible business is just going to need to plan for a number of eventualities as indeed to be fair, the regulators have demanded, and keep very and very much an eye on how that develops.
Peter Snowdon: OK I think we will call it a day for now. Thank you everybody we will return with a video in a short while giving more detail on, in particular, branch applications to UK regulators.