By Pamela Barbaglia and Huw Jones
LONDON (Reuters) - Investment banks have warned M&A teams in Britain they cannot pitch business to clients in the European Union if there is a no-deal Brexit without an EU "chaperone" sitting in on their meeting, sources familiar with the matter told Reuters.
Banks including Nomura and Credit Suisse (SIX:CSGN) have told dealmakers in London that in a no-deal Brexit scenario they would have to loop in EU colleagues when talking to customers in continental Europe about specific advisory work and regulated products like loans or bonds.
Even cold-calling of company executives to pitch for new business out of London could raise eyebrows among EU regulators if Britain crashes out of the EU without a deal, the sources said.
"There is a whole bunch of things people have to do in the course of an M&A transaction which require regulation," Simon Gleeson, a financial services partner at Clifford Chance, said.
"The problem is that at the start of the discussion you have no idea how you're going to finance the deal and technically you should tell clients every five minutes 'oh, I can't do this, I can't do that,' which is a bit worrying," Gleeson said, referring to what could happen if there is no Brexit deal.
A Credit Suisse spokeswoman said the Swiss bank was working to maintain access to EU clients and markets by using its existing infrastructure in the event of a hard Brexit.
"Discussions with relevant regulators, employees and key stakeholders continue but as we have previously stated, our solution will involve multiple locations, including Madrid, Frankfurt and Luxembourg," she said.
"London will remain a key part of the bank's footprint even after the UK's exit from the European Union," she said.
Nomura declined to comment.
Prime Minister Theresa May suffered another parliamentary defeat on Thursday in her attempt to win backing for a Brexit deal that would mean business as usual for bankers until the end of 2020.
But with Brexit due in just over 40 days and no deal in sight, bankers are having to face up to what a no-deal Brexit will actually mean and make contingency plans.
"If Britain crashes out of the EU, even pitching ideas to EU clients is unchartered territory," a London-based M&A banker at a European investment bank said.
"We will need a chaperone who is cleared by EU regulators to witness our conversations."
REVERSE SOLICITATION
M&A bankers have until now seen their jobs as Brexit-proof because unlike other banking roles, including selling and trading equities or bonds, dealmaking is effectively unregulated.
Major investment banks have offices across Europe and London-based M&A staff typically liaise with their local counterparts when working on live deals.
If Britain agrees a Brexit deal, banks will mainly relocate staff working with regulated products and will also benefit from a transition period to adjust to life after Brexit.
But without a withdrawal agreement in place there will be no transition period.
A no-deal Brexit would harm an M&A banker's ability to interact freely with EU companies and develop relationships with local executives to win lucrative advisory mandates down the line.
Bankers in London would need to hand all financing and deal execution activity to colleagues inside the EU, the sources said. They would also need a "letter of engagement" from a client, giving them the right to represent EU companies in M&A discussions, the sources also said.
This refers to the legal principle of "reverse solicitation."
Barney Reynolds, a financial lawyer at Shearman & Sterling, said EU financial rules recognize the principle of reverse solicitation, which is where a customer in the EU can ask for a service like M&A advice from a firm that does not have a branch or subsidiary in the bloc.
"It's not a panacea but it's a known legal principle. You would need to have processes and procedures in place to show that you were approached by the client in the first place," Reynolds said.
But a lack of clear guidelines from EU regulators on reverse solicitation creates uncertainty, according to law firm Norton Rose Fulbright, and could lead to sanctions and the risk of investors trying to rescind contracts if wrongly used.
Some banks including Credit Suisse are monitoring how much time their M&A bankers spend in the EU versus London to establish which is the best location for their top deal makers.
"It's not entirely clear what we can do and cannot do after March 29. What's certain is that under a no-deal scenario the entire pipeline would be disrupted," another M&A banker at a major U.S. investment bank said.