As Brexit debate begins, Hong Kong financial firms seek to avoid being tripped up by UK divorce from EU

Chad Bray
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As Brexit debate begins, Hong Kong financial firms seek to avoid being tripped up by UK divorce from EU

The ongoing drama surrounding the acrimonious break-up between Britain and the European Union could affect thousands of businesses that use London as a base for their European operations.

Though the drama is playing out more than 9,000 kilometres away, some of Hong Kong’s biggest financial institutions are trying to avoid being caught in the middle.

HSBC and Standard Chartered – two of the three lenders that issue bank notes in Hong Kong and important drivers of the city’s economy – are among those that have been planning for Brexit since the referendum in Britain two and a half years ago.

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Yet, uncertainty remains over what the ultimate relationship will be between the UK and its European neighbours just over two months before Britain is set to leave the 28-country bloc.

Debate begins in parliament on Wednesday over a contentious deal reached by British Prime Minister Theresa May setting out the country’s exit, but that agreement has been widely criticised by opposition leaders and members of her own Conservative Party.

If parliament fails to approve that measure, fears are rising that Britain could crash out of the EU with no deal, creating a tougher environment for banks and other businesses operating out of London.

Questions about what form Brexit will take are already weighing on the UK’s economy as the country prepares to sever direct ties with its largest trading partner, according to the Bank of England.

“The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth,” the central bank’s Monetary Policy Committee said in December. “Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term.”

Economists have expressed concern that the British pound could crash and in a “no deal” situation and Britain’s economy could slow dramatically, which would hurt financial firms and other companies with significant operations in the UK.

In a research report last year, the International Monetary Fund said there would be “no Brexit winners” between Europe and the UK because of the integration of the two economies, particularly in terms of supply chains and capital flows.

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Louis Chan, assistant principal economist at the Hong Kong Trade Development Council, said that Hong Kong could potentially benefit from Brexit as the UK looks for new trading partners.

“We’ve already seen some increase in trade figures” between Hong Kong and the UK, Chan said. Through the first 11 months of 2018, the UK surpassed Germany as Hong Kong’s largest trading partner in Europe.

Banks operating out of London will not be able to continue to sell products and provide financial services to European clients from London as in the past.

Financial institutions based in the UK were previously able to serve European customers through a process known as “passporting”, where financial institutions licenced in one country in the EU were allowed to serve customers in other member states.

Those rights are no longer guaranteed once the UK leaves the EU, so banks, insurers and other financial companies have been opening new hubs in Dublin, Frankfurt, Paris and other European cities.

Standard Chartered and HSBC, which are both based in London, but heavily reliant on Asia for a large portion of their revenue, have outlined plans to shift staff and operations to Europe following Brexit.

HSBC, which employed about 229,000 people worldwide at the end of 2017, has said it would shift some London-based jobs to its existing operations in Paris and has shifted control of several of its European branches there in recent months.

“After Brexit, it will be against European law to conduct some activities from outside the EU once the UK leaves the single market,” a HSBC spokeswoman said. “This could mean that up to 1,000 London-based jobs, which support activity in continental Europe, may need to move.”

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The UK accounted for about a quarter of HSBC’s revenue – US$6.81 billion – in the first half of 2018.

Last month, Standard Chartered, which employed 86,000 people worldwide at the end of 2017, received a banking licence in Germany. The bank has said that it would optimise its European structure “to mitigate any potential impact to our clients, our colleagues and the group as a result of Brexit, including loss of EU passporting rights.”

The bank has nearly 200 employees in Frankfurt and said in December that “it is expected these numbers will increase in the future.”

Gabriel Buck, the former chairman of the British Bankers’ Association’s Export Finance & Trade Committee and a former Barclays executive, said that he was “very concerned” about the potential downside risks of a so-called hard Brexit, where the UK was no longer part of the single market in Europe.

“As a banker of nearly 40 years and having spent most of my career dealing with international trade, I believe the ‘leave’ supporters seriously underestimate how integrated the UK economy is with Europe, and at the same time they are overly optimistic about how any shortfall caused by Brexit will be made up by the UK trading with the rest of the world,” said Buck, the founder of GKB Ventures, a boutique advisory firm in London.

The spectre of Brexit also comes as both HSBC and Standard Chartered are looking to reassure investors.

John Flint, who completes his first year as HSBC’s chief executive in February, has been tasked with improving the bank’s profitability and returns after years of retrenchment that saw the bank shed jobs, exit dozens of businesses and spend tens of millions of dollars to improve its regulatory structure.

In October, Flint said that the bank was beginning to unlock its revenue potential and said that Brexit and other global headwinds had not caused the company to alter its focus.

Despite positive results since Flint took the top job, the bank’s shares are off more than 17 per cent in London and 25 per cent in Hong Kong since its highs in January of last year.

At the same time, Standard Chartered CEO Bill Winters is expected to lay out his latest strategic plan for the bank in February just over a month before Britain is expected to leave the EU.

Winters, the former co-head of JP Morgan’s investment bank, has spent the past three years reshaping Standard Chartered, which was one of the better performing banks during the financial crisis, but struggled beginning in 2013 as emerging markets economies were under pressure.

The bank has returned to profitability and shown positive signs of growth, but the pace of the turnaround has frustrated some investors.

The lender’s shares are down 28 per cent in London and 38 per cent in Hong Kong from its highs in January of last year.

 Whatever happens with the parliament vote later this month, the question remains how large a role London – and its banks – will play in the financial world going forward, said Rebecca Harding, CEO of Coriolis Technologies, a provider of trade finance data.

“It is inevitable that London’s role as a financial centre will change after Brexit, and whether its role will be less significant will depend on the outcome of discussions in the coming weeks,” Harding said.


This article As Brexit debate begins, Hong Kong financial firms seek to avoid being tripped up by UK divorce from EU first appeared on South China Morning Post

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