A Brexecutive Briefing on the financial services sector…
Financial firms have urged the UK to seek an ambitious trade pact with the EU to fend off the threat of jobs and companies migrating to the continent after Brexit. There is concern in the UK about London’s future as Europe’s financial hub post-Brexit, given that the sector is the country’s largest exporter and source of tax revenue. This has seen EU cities such as Paris and Frankfurt jostle for position to attract financial businesses that are considering leaving the UK.
The key risk for the financial services industry is that if the UK fails to negotiate new trading relations with the EU, then banks, fund managers and insurance companies based in the country could be frozen out of the bloc’s markets when Brexit officially occurs in March 2019. Banks that are authorised in London currently have the capacity to “passport” their services across the EU. This means they can sell their services to consumers across the bloc without having to apply for a license in each country that they trade in. But this system will end in the spring of 2019 when the UK officially exits.
Ensuring the same level of mutual access for EU and British firms is essential for London and the UK as a whole to retain its status as the global hub of the financial services industry. But with the continuation of passporting appearing to have been ruled out by Brussels, there is a clear need for a new system that retains many of the existing scheme’s benefits. Whilst achieving such a deal would be a major positive for the sector and the wider economy, it also appears to be a big ask for the British negotiating team, whose position so far on the issue has appeared vague and insubstantial. As well as being a critical issue for financial firms that are currently based in the UK, it also has resonance for new entrants that are looking to establish a European base. For example, should a US-based company looking to expand into the European market be confident about selecting London as the base for its operations?
The lack of clarity on the issue is already having an effect. Several banks and insurers have already announced plans to open subsidiaries in EU member states to ensure continuity after March 2019, which indicates a lack of confidence in a satisfactory trade pact being struck by then. That said, a recent report by Reuters suggested that fewer than 10 of the approximately 40 banks that conduct their European operations out of London have so far sought a licence to continue banking in the EU after the UK’s exit. The European Central Bank has expressed concern at the slow pace of applications and said that some in the sector are not Brexit ready.
More positively, smaller lenders in the UK have identified potential upsides that Brexit could have on their business. Existing ‘one size fits all’ regulatory norms for the sector that stem from EU legislation oblige smaller firms to follow expensive compliance and reporting processes that are designed for bigger companies. A revised and more bespoke regulatory system post-Brexit could reshape the landscape to the benefit of smaller players.
The B2Brexit team will track events closely and offer your company up to date risk assessments and consulting on how the new trade pact is shaping up and how it might affect your company’s future in the financial services sectors of both the UK and the EU.