Carney’s letter is smokescreen to allow firms to break cover on hard Brexit plans

The letter from the governor of the Bank of England, Mark Carney, to UK financial institutions telling them to prepare contingency plans for a hard Brexit with no trade deal, equivalence or passporting for financial services is a clever public relations manuoeuvre.

Some of the headlines it has attracted might leave readers with the impression that many financial institutions are in a state of denial over the likely outcome of the Brexit negotiations, naively clinging to hopes of a deal that doesn’t disrupt the cross-border trading and client relationships. In my experience of talking to a lot of senior folk in a wide range of City firms this is far from the truth. From last summer they have been drawing up plans for a hard Brexit with few deals that preserve the status quo with Europe.

What they have struggled with is making these plans public.

As the sand starts to fall fast on the Article 50 negotiations they need to make decisions, not least on how to maintain crucial access to European markets. In particular, they need to finalise decisions on where to domicile their European business. This is where they find themselves in a difficult position.

Firms know these decisions have to be made in the next few months if the regulatory hurdles are to be negotiated, premises found and equipped and staff recruited in time for the end of the Article 50 process in March 2019. However, going public on these decisions represents a huge vote of no confidence in the ability of the UK government to come out with a softer Brexit deal that keeps access to European markets for financial services on the same footing as present. This doesn’t wash with the Brexit ministers who don’t want to hear what they consider to be defeatist talk.

Tensions in City firms

We have seen tensions surface at firms when people have gone public prematurely on their plans, such is the nervousness about alienating government ministers – JLT backtracks on Brexit contingency plan statements. Carney’s letter is a smokescreen to allow them to break cover and push on with their hard Brexit plans.

It follows hard on the heels of Lloyd’s of London announcing its decision to set up a new office in Brussels. This has given the green light to the rest of the insurance industry to move ahead with their plans.

Negotiations have started badly

If there were people in the City who really believed the UK government could exit the EU and maintain almost uninterrupted access to European markets within the frantic Article 50 timetable, that mistaken confidence has been vigorously shaken by the opening phases. Theresa May’s notorious inflexibility has seen her government already outmanoeuvred on free movement of people and Gibraltar, not to mention the Scottish independence referendum.

Financial institutions know they must take control of their own destinies because they are not safe in the government’s hands. Carney has given them the green light to do just that.