A Wise Man Once Said, “The Longer You Wait For Something, The More The Uncertainty Grows.”
The predictions have turned to reality. With the UK’s historic and unprecedented decision to sever the ties with the EU in June last year, a decade of uncertainty stretches before us.
We have covered many aspects of potential Brexit repercussions so far, but today we will be looking particularly into what the elected referendum outcome could mean to the country’s financial services. Because make no mistake, Brexit and the impact on financial services could be huge.
Post-Brexit Forecasting: Brexit And The Impact On Financial Services
The financial sector is an extremely important and vital one, not just for the national, but global economy, as this Oliver Wyman report goes to prove:
“The UK-based financial services sector is a significant contributor to the UK economy. The sector annually earns approximately £190 billion – £205 billion in revenues, contributes £120 billion – £125 billion in Gross Value Added (GVA), and, together with the 1.1 million people working in financial services up and down the country, generates an estimated £60 billion – £67 billion of taxes each year. It contributes a trade surplus of approximately £58 billion to the UK’s balance of payments”.
So what is going to happen in this assumed 10 years of transitional period to complete independence from the EU? As of now, nobody really knows. Because Brexit is such an unprecedented political event, even the most apt financial experts can feel at sea.
Staring at our crystal ball of national and EU politics, what do we see? Several scenarios unfold.
We can roughly divide Brexit and the impact on financial services into three categories:
Economic Impact On The City
As of now, London’s position as one of the regional and global financial hubs remains unchallenged. This is mostly due to its well-established, sturdy network of institutions, support systems, and other advantages that are hardly paralleled by other places.
The experts at Grant Thornton claim that Brexit will pose a significant regulatory/legislative challenge, because more than 40 years of EU regulation have not been formally enshrined in UK law.
The question that lies before the Government is, once the EU legislation stops being effective, how to avoid and fill in the numerous gaps in the UK’s domestic legislative framework? In other words, how to adopt EU laws into UK ones?
Because whether formally in the EU or not, there is no doubt the UK will still need to comply with various EU regulations if it wants to continue conducting business with the countries that are in the Union.
Impact On International Trade
Many suspect that Brexit will result in a plunge of export of financial services to other EU countries, even though there are alternatives, such as founding subsidiaries or making bilateral trade agreements. The organisation Open Europe explains it with the following argument:
“If the current passporting system is lost, there are three broad alternatives: regulatory ‘equivalence’ with the EU, bespoke agreements, and local arrangements. Where the UK Government does not succeed in negotiating cross-border access, financial firms will still be able set up local branches and subsidiaries if they wish to continue to provide services in certain member states.
However, this may require significant investment in terms of capital, staff and infrastructure and may involve moving some of it from the UK. We believe that the Government’s primary objective, with regards to financial services, should be to try and keep the CRD IV passport.”
Final Words: Brexit And The Impact On Financial Services
All in all, it seems that, while formally independent, the UK will still have to rely heavily on EU and maintain legal compliance – if its financial services and all other aspects are not to suffer. Perhaps we should be asking ourselves, has Brexit become the new “Much ado about nothing”?
Time will tell but Brexit and the impact on financial services is worrying for many people. The three scenarios we’ve painted here are the most logical ones that elaborate on Brexit and the impact on financial services in the UK.
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