Earlier this summer, the United Kingdom voted to exit the European Union by a small majority, an unprecedented move that has experts around the world trying to understand the implications. While there are still questions on how the move, dubbed “Brexit,” will affect the financial services industry in the long term, it’s clear that it will change the way people do business in Britain — and around the globe.
Some of Brexit’s impact is already taking shape. Both Fitch and Standard & Poor’s have already downgraded the UK’s credit rating, and the pound has hit a 31-year low against the dollar. Early predictions by the International Monetary Fund estimated that Brexit could reduce economic growth by up to 5.6 percent over the next three years due to the declining pound and trade disruptions as the UK is forced to re-negotiate trade deals with individual countries throughout the EU and the world.
The Financial Services industry accounts for over 2 million jobs in UK’s economy – two-thirds of which are located outside of London. It’s also the UK’s largest taxpaying sector, contributing over 66 billion pounds in the 2015/16 fiscal year.
The City of London has long been one of the world’s top financial centers, a status due in part to the ease of doing business within the European Economic Area (EEA) through the mechanism of passporting. British-based financial institutions such as banks, fund managers, and insurers have been able to sell their services without setting up subsidiaries in each member state, something which has attracted financial institutions from outside the UK and the EU to make their headquarters in London.
As we look ahead to the coming Brexit, we examine three areas where the financial services industry can expect to feel big impacts — regulatory impact, economic impact in the city of London, and implications for cross-border activity — and provide guidance to help our clients prepare for the economic changes to come.
There are many factors that can be considered potential positives in terms of regulation standards following Brexit. UK standards already lead regulation in several areas, such as Retail Distribution Review (RDR) implementation in 2013, tougher Bank of England stress tests in 2014 and ring fencing of retail banks from their commercial arms beginning in 2019. Even so, there will likely be an ongoing need to comply with new EU regulation in order to continue to conduct business across the EU. Click here to read more.
Economic Impact in the City of London:
It could be argued that the city of London is unlikely to be challenged by Brexit in the short term due to its competitive advantages and a highly developed ecosystem of capabilities and support services that would be hard to quickly unwind or replicate elsewhere. But the city, which has enjoyed a status as the financial capital of Europe, could still face uncertainty and competition as a result of the decision to leave the EU. Click here to read more.
Implications for Cross-Border Activity:
Of all EU legislation currently in force, one of the most important from a banking perspective is the concept outlined in the MiFID known as “passporting.” Passporting, one of the central pillars of the EU financial services regime, gives banks in a member state the ability to carry on business and sell services throughout Europe without obtaining a license or similar in each individual country. Currently, many financial institutions established in the UK rely heavily on passporting rights to operate in the EU. When the UK exits the EEA, financial institutions established in the UK would lose their passporting rights unless an alternative trade arrangement for access is negotiated. Click here to read more.
How Financial Services Firms can Prepare for Brexit Changes:
While it’s still unclear exactly what specific regulations and laws will be affected by Brexit, there are four main areas that financial services institutions can begin to focus their considerations: Passporting and the right to operate across borders; employment legislation; operations; and data retention and transmission. Click here to read more.
We look forward to working with our clients to navigate through these changes and the more to come.