LONDON – The UK government triggered Article 50 of the Lisbon Treaty and formally start negotiations to leave the European Union this week.
It took the form of a letter, and the UK's permanent representative to the European Union, Tim Barrow, handed it over to EU Council president Donald Tusk personally.
Here is what that means for the City of London and the UK's financial centre:
What kind of deal will the UK get with the EU?
Well, there is no guarantee the UK will get a deal at all at the end of two years. Before negotiating a grand free trade agreement, the two parties have to thrash out the treatment of EU citizens in the UK and British citizens in Europe.
As well as that, there is the small matter of the so-called Brexit divorce bill.
The EU has demanded a €60 billion (£51.6 billion) payment to settle accounts upon leaving, something that the UK has said it won't sign up to. This could be enough to scupper negotiations at the outset. "Agreeing an exit payment will be politically difficult for both sides. Some observers see a greater than 30% likelihood that talks fail at this first stage," the BAML analysts said in a note to clients earlier this month.
Once that hurdle is overcome, whatever free trade agreement or framework can be negotiated in the remaining time will likely not include a financial services passport. Prime Minister Theresa May's government has prioritised immigration control over membership of the European single market, and so automatically forfeit access for financial services.
What is the financial passport?
If London is like a bridge, funnelling capital and funding from the US and Asia into Europe then the passport is the series of pillars holding the bridge up.
It is an agreement that allows banks with a base in the UK to access customers and financial markets in the (currently) 28-nation EU trading bloc. The passport is essentially a system of common financial rules that all countries in the passport network sign up to.
For example, a US or Japanese bank can set up a subsidiary in London and from there operate branches on the continent. If the UK loses the passport, those branches won't be tethered to a country in the EU single market and therefore be unable to carry out the range of services they might want to.
The loss of passporting rights would be devastating to the City of London. The Financial Conduct Authority (FCA) said earlier this year that 5,500 UK companies rely on passporting rights, with a combined revenue of £9 billion.
It would also be bad news for the UK economy as a whole, economists at Berenberg, one of Europe's oldest banks said in a note to clients this week: "In our base case, we expect the UK and EU27 to agree on a deal that covers almost all goods and some services, with the UK losing its EU financial services passport. Such a Brexit would reduce the UK’s long-term potential growth rate to 1.8% pa from its pre-Brexit rate of 2.2%."
ReutersWhat are banks worried about?
Most banks have conceded that the UK will probably lose the financial passport, the main question is when.
The financial industry is concerned that when the two years is up, there will be a so-called cliff edge when the passporting rights are switched off.
Banks are huge organisations and can take a long time to move people around and change their operations. They are pushing for a transitional arrangement giving them as long as 10 years to phase out the passport and adjust to the new world.
The chief concern is that the UK government is not as worried as it should be about the potential turmoil that a cliff edge could produce, and so might not push for a transitional deal. This is a sentiment echoed by a House of Lords committee, which warned ministers are not taking the concerns and advice of trade experts "as seriously" as they should on Brexit.
Why can't they just move to Europe?
Well, they might. The question is where.
No one city among the likes of Frankfurt, Paris, Dublin, Milan and Madrid can take all the banks at once. There is not enough office space or supervisory capacity to make such a move feasible so the banks are more likely to spread operations around the continent.
It is expensive and time-consuming to move people, technology and balance sheet activities but if it is less expensive than staying, then the international banks will do it and spread themselves out.
It will not be easy. The European Central Bank, which is the top regulator for lenders in the eurozone has said they will subject banks to a tough assessment before they are allowed to set up on the continent.
Sabine Lautenschlager, vice-chair of the Frankfurt-based Single Supervisory Mechanism, a unit of the European Central Bank, said applications for European licences will be scrutinised closely on Monday.
What does it mean for jobs?
London will likely lose financial jobs as a result of Brexit. In fact, it is beginning to happen already.
According to a survey by Morgan McKinley, the number of new available jobs listed in the the UK's financial centre fell 17% in February year-on-year to 6,945.
The number of people seeking jobs dropped by a huge 38% from February 2016, while month-on-month the number of fresh open positions decreased by 23% in February.
Meanwhile HSBC, JPMorgan, and UBS have all warned about job relocations. Jamie Dimon, CEO of JPMorgan Chase, told Bloomberg at Davos that the bank will likely move more people than previously thought. "It looks like there will be more job movement than we hoped for," Dimon said. The bank employs 16,000 people in the UK.
HSBC CEO Stuart Gulliver said around 1,000 bankers in HSBC's investment banking and markets divisions would "probably need, in our case, to go to France."
It is not just the loss of the passport that is bad for job growth in London, but also the potential for immigration restrictions on EU citizens — which make up a sizeable percentage of financial roles.
What does it mean for hedge funds?
It is not just banks that will have difficulties, but also fund managers.
Markets and deals are based in London, but the money managed by the market participants is often based in places like Ireland or Luxembourg for tax reasons. The European rules known as UCITS Delegation Procedures allow funds domiciled in those places to access London’s financial markets.
The rules "are very important," David Wright, a former European Commission official focused on financial rules, said last month. "If you couldn’t do that any more, that’s a game-stopper for London. Firms will take hard-headed decisions on the basis of maintaining their business and clients – not waiting for Brexit negotiating uncertainties and haggling."