On the 23rd of June 2016, the British public shocked the world by voting to leave the European Union. The issue went to a referendum, with 51.9% voting for a British withdrawal from the EU. Prior to the vote, the issue has been highly debated among finance circles.
Exactly what this means for the future of the UK is still unclear. It seems that the chance of a “no deal” Brexit scenario is now a real possibility.
The UK/EU financial services sector are closely integrated. The decision to formally withdraw from the European Union could have far-reaching consequences.
London is currently the financial capital of Europe. But could the decision to leave the EU cause London to lose its title? Read further as we explore key Brexit issues that could happen.
If you’re a financial firm in an European Economic Area (EEA) country, you can carry out operations in any other one. This is a system known as passporting.
Passporting rights are important to many types of financial services. Examples include banks providing clearing services, derivative traders and investment managers.
But how would it change in a “no deal” scenario? Passporting within the UK could end. This would put the UK outside of the EU’s regulatory framework.
The position of UK firms in relation to the EU would change. They would have to follow the rules and regulations of the relevant member states.
The UK put out a notice. This notice outlines how they plan to mitigate any disruption to financial services. For instance, the UK government intends to introduce a temporary permissions regime.
This will allow EEA firms currently exercising passporting rights to continue. This arrangement would last for 3 years after the UK leaves the EU.
The UK government also outlined plans to have a temporary recognition regime. This would enable non-UK central counterparties to provide clearing services to UK firms. Again, this is for up to 3 years after Brexit.
The UK government has also expressed a desire to continue working with stakeholders. They intend to ensure functional financial services during and after Brexit.
Time will tell if these measure are enough for the UK to remain the financial capital of Europe.
Leaving the UK?
Despite these reassurances from the UK government, many financial services firms have made arrangements to move. Or they’re considering a move to the continent.
Research suggests that over a third of firms are considering moving. It also suggests that firms are solidifying their plans to move. For example, around 25% of companies confirm they have plans to move operations to Europe. This is an increase from last year, when only 19% had such plans.
It seems that the time for speculation has passed. Firms are now thinking about moving some of their operations out of London. But where are these companies planning to move their operations to?
Where to Next?
Depending on the specific industry, firms have eyed major cities all around Europe as the next place to set up shop.
Many banks, asset managers and insurers have their eyes set on Dublin and Frankfurt. Both cities are considered an ideal location to set up the regulatory and legal structures necessary in order to continue doing business across the EU.
When it comes to trading, Paris appears as the number one choice for relocation. Trading has a large impact on the economy since it creates a lot of jobs and generates a lot of taxes.
For investment banking, cities such as Madrid and Milan have proven to be a popular option. The New York Times has also ranked Amsterdam as the number 1 destination for the financial world after Brexit is finalized.
Some suggest that London stands to lose up to 12,000 jobs in the short-term aftermath of Brexit. It could lose even more in the long-term.
A Hostile Environment
Brexit has created a strange environment for businesses and financial services in the UK. The conservative party has long been considered the natural ally of British capitalism. But in the run up to Brexit, these sectors have been treated with open hostility by the party.
Former foreign secretary Boris Johnson was asking about the impact Brexit would have on British business. He reportedly responded with a vulgar term, cick here for details.
Former Brexit secretary Dominic Raab also caused outraged when he accused British businesses of using Brexit as an “excuse” for their own weakness.
With such attitudes being displayed at the highest level of government, it is no surprise that many firms are weighing up their options.
Brexit Issues: Is the Situation Over-Exaggerated?
Despite all of the negativity surrounding Brexit, many analysts suggest that the impact it will have on financial services is exaggerated.
Synechron Inc, for instance, has produced research into the short and long-term impact of leaving the union. They found that 72% of British bankers believed London will still be the financial center of Europe in five years.
Despite this optimism, they still found that 78% of executives think Brexit will have a negative effect on the UK finance industry. Quite interestingly, they also found that 82% of executives believe the EU itself will be negatively affected.
Many executives still believe that the UK could come out on top in negotiations. 51% of executives reportedly believe the UK can create a trading agreement that is tailored to the UK’s national interests.
Chances of “No Deal” Rising?
As of November 2018, it seems the chances of a “no deal” scenario have risen significantly. The current Prime Minister, Theresa May, suffered a string of resignations from her cabinet.
Many ministers, including the Brexit Secretary Dominic Raab, have resigned in protest of Mrs. May’s proposed Brexit terms. At the time of writing, proceedings have started to submit a motion of no confidence against the Prime Minister.
Currently, the government is in such turmoil it’s hard to predict what’ll happen next. But now that you’ve read up on Brexit issues, you’re better prepared for any possible twists and turns.
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