Graham Bishop is not a cheerful man. Yes, he's just been appointed as the external communications lead for the new Financial Services Negotiating Forum, but the circumstances that brought this about are far from ideal. "Things aren't going to be at all easy for the City," declares Bishop from his office in Britain's East Sussex. "People have voted for something they weren't told about by the politicians asking for their support. There are going to be some very big consequences."
If you voted Leave, you might be inclined to dismiss Bishop as an EU-infused remainer still banging the pre-referendum doom-drum. A former Citigroup economist, Bishop has spent the past 16 years running a consultancy on full-frontal EU integration. He's worked for the European Commission and the European Parliament. He played a key role in designing the changeover to the euro and describes himself as, a "dedicated Europhile".
While all of this may mean that Bishop isn't the most impartial person when it comes to Brexit, it also means that he a good handle on what might happen next. And he thinks that what might happen next is very bad: in a few years, the City will be a completely different place, and this will have serious repercussions for the UK as a whole.
Bishop sketched out his scenario in a paper sent to subscribers to his website in early June, before the referendum took place. Titled, 'Insoluble Contradictions of the Leavers’ Policies: A Scenario for Timeline to Reality,' it outlined his expectations for the future.
Bishop's bad timeline
In that paper, Bishop's bad version of the next two years went like this.
The UK prepares to trigger article 50. The EU prepares its negotiating position. Article 50 is triggered.
The UK financial services industry starts to realise that negotiations are unlikely to lead to a satisfactory regulatory outcome and makes preparations to leave the UK.
The UK realises that it has no negotiating leverage with the EU [on migration] and Brexits messily, accepting whichever "arrangements" are thrust upon it.
EU regulations cease to be binding in the UK. UK-based banking firms lose their passporting rights to do business in the EU. Banks move large chunks of their UK operations to mainland Europe.
The impact of the City's demise is felt across the UK. £21bn of financial services earnings with the EU migrate to the euro-area; a significant portion of the £50bn of financial services earnings from the rest of the world migrate along with them. Other UK exports hit the EU’s Common Customs Tariff wall (up to 10%) and slump. The UK's current account deficit rises dramatically, with the potential to trigger catastrophic capital outflows. Because a significant portion of the City’s £65bn of tax revenues have moved to the euro area, the UK’s budget deficit approaches £100bn.
Now, this all seems a little extreme. Firstly, Theresa May has indicated that she has no intention of triggering article 50 until 2017, meaning that Bishop's hypothetical timeline is at least five months too early at best. Secondly, what of the negotiations? What of the weekend article in the Observer stating that the UK may be able to negotiate a seven year brake on freedom of movement whilst still accessing the single market? What of Boris Johnson's assurances that everything will be fine and that financial services firms will retain passporting? Even if they don't, what about MiFID II, which could theoretically allow UK--based firms access to European markets under the “third country regime”?
Bishop concedes that his timeline might be a little syncopated. It's too fast, he agrees - but things could crystallise fast after Article 50 is triggered.
He is less repentant regarding the bleak outlook for passporting. Financial services firms will only be able to passport into the EU from London if the country has continued access to the EU single market, and this access depends upon an agreement about the free movement of people. Senior Conservatives, including Brexit Minister David Davis have indicated that migration is a "red line" while French prime minister François Hollande has indicated that the UK will not able to access the free market without it.
In Davis's version of events, the EU will make concessions once it realises Britain's intransigence on migration matters. Bishop is not so sure: "Cloud cuckoo land is at work here," he says. "You can vote as much as you like for something but that doesn't force other countries to comply - look at Greece's attempt to vote itself an EU bailout." What about the suggestion that the UK might be able to negotiate a seven-year brake on freedom of movement? Bishop says the sources quoted in the Observer article were all very junior and that the claims will only hold weight if repeated by more senior figures.
Nor does Bishop hold much hope for 'equivalence:' "If you have equivalent regulation, who decides what's equivalent? The European Commission." If UK financial services firms access EU markets under equivalence, he points out that Britain will be compelled to enact all future EU finance regulations into UK law without any say in their formulation. "The next version of MiFID - MiFID III might require that the control of all functions be located in the eurozone," says Bishop. "And then what?"
Unfortunately, this leaves one potential outcome - and one that would be the most damaging for the City of London: World Trade Organisation (WTO) rules. WTO rules are the default for most trading relationships and will come into effect directly after a Brexit, says Bishop. They state that countries cannot discriminate between trading partners by offering selectively preferential or punitive tariffs, but - crucially - they do not cover financial services. This is why Swiss banks like UBS and Credit Suisse have been obliged to set up London-based subsidiaries to access the EU.
As a result, Bishop argues that the UK is in danger of leaving the EU in the messiest way possible for the City. And that the country will suffer the consequences: "If the UK leaves the EU because it can't get agreement on free movement, and there are no other arrangements in place, then WTO rules will apply - and broadly speaking, these exclude financial services. The City will be in a very vulnerable situation.
"Net exports for the UK financial services industry are bigger than for all other sectors combined and David Davis is going to have to learn that pretty quickly," Bishop concludes. "If he still wants to shoot the golden goose, then so be it."