Brexit: What Lies Ahead for the UK’s Financial Services?

As politicians argue about single markets and transition periods, banks and insurers are having to make tough calls about where and how they do business post-Brexit. 

Tabloid headlines are keen to highlight the disunity in Theresa May’s cabinet over Brexit policy. A 21-month transition has now been agreed between the UK and EU, but there is no provision to extend the period if the future trade talks are not all wrapped up in time.

Throughout the transition phase, Britain will have to abide by EU rules, particularly freedom of movement.

The UK will be allowed to negotiate new trade deals elsewhere during the transition period. The UK will fall out of the bloc at the end of March 2019 under the terms of Article 50, which Theresa May triggered nearly a year ago.

Yet while politicians argue over single markets and hard borders, financial services companies which will have to do business in the post-Brexit era are making difficult decisions about whether to leave London, how many staff to relocate and how quickly to move.

When it comes to the timetable and detail about how and when Britain will leave the EU, there is continuing uncertainty.

The governor of the Bank of England, Mark Carney, has urged companies to start planning, rather than hoping for a soft Brexit. As a result, many banks and insurers have already set relocation plans in motion.

What’s at stake following Brexit?

Financial services companies in the City of London have been lobbying hard for politicians to secure a bespoke deal for the financial services industry, amid warnings of a loss of tax, income and jobs in Britain.

If Britain were to leave the EU with no deal at all, this would impact on Britain’s reputation as a world financial Centre and financial safe haven. Although London would continue as the Centre of domestic and retail banking, its international and investment banking operations might relocate elsewhere.

Under the current pass porting rights, finance firms can offer financial, advisory and trading services to corporate clients across all EU states via just one local license. Prime Minister Theresa May has said these rights won’t be preserved.

This is a key concern for banks, as it will mean they will need to obtain additional authorization in the areas they operate in.

An uncertain future for the financial services industry

Britain’s huge financial services industry will be deeply affected by the eventual Brexit deal. Britain is the base for the biggest number of banks in the world and is home to the largest commercial insurance market.

Many of these companies have already announced that they will be moving from London, in order to be able to continue their operations within EU rules and legislation.

About six trillion euros (£5.3 trillion), or 37 per cent, of Europe’s financial assets are managed in London, double that of Paris. London is also the biggest player in Europe’s 5.2 trillion euro investment banking industry.

Around 1.1 million people work in Britain’s financial sector and it is an important source of corporate tax revenue for the UK government.

London could lose 10,000 banking jobs and 20,000 roles in financial services as clients move 1.8 trillion euros ($2.1 trillion) of assets out of the UK on Brexit, according to think-tank Bruegel.

This would have a very significant impact on the UK economy as the financial services industry creates an estimated £190 billion worth of value a year, equivalent to around 12 per cent of the total UK economy.

The Likely impact

Brexit is likely to result in a significant upheaval as banks, clients, market infrastructure and regulators simultaneously carry out their plans to prepare for the UK’s departure from the EU, according to PwC.

In its report: Planning for Brexit: Operational impacts on wholesale banking and capital markets in Europe, PwC says establishing a banking operation in a new location can take two years.

It involves “setting up a legal entity, obtaining regulatory approvals for the banking operation, finding suitable office space, hiring new staff, and setting up operational processes and supporting technology to facilitate the day-to-day operation of the business.  ”Where activities are being transferred to a new location, the bank will need to recruit staff locally, relocate existing staff to the new location, or adopt a mixture of the two approaches, PwC says, If a bank is winding down some activities in a location (either by transferring them elsewhere or ceasing some activities altogether), it may need to consider headcount reductions. “All of this must be done in accordance with local employment law and (particularly relevant when relocating staff cross-border) immigration rules. 

”A key consideration is that after Brexit those staff that do remain in London may not enjoy the same freedom to move and work as they have done in the past.

 

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