By Ananya Upadhyay
Today, almost half of the worlds financial firms have their European headquarters based in London, and more than 1 million people work in the financial sector in the UK including services like banking activities, insurance, asset management and market infrastructures. With related professional services (accounting, legal, advisory, etc), the number reaches 2.2 million people. The financial sector earned about GBP 200 billion (approximately 11% of UKs GDP) in total revenues in 2015, half of which pertains to domestic activities, while the other half includes international business related with the EU and other foreign markets. This represents about 24% of all EU financial services and generates about GBP 60 – 67 billion (3.5% of GDP) in taxes each year.
Impact of Brexit
The financial services sector, together with the related professional services sector, has developed over many years into an interdependent, interconnected system comprising a large variety of firms providing world-class services, products, and advice. This ecosystem brings significant benefits to financial institutions and to the corporations and households they serve.
The high level of interconnectedness within this ecosystem means that the effects of any exit from the EU are likely to extend beyond business done directly with EU clients. Impacts to one part of the ecosystem will invariably have knock-on effects elsewhere. For example, a firm that loses its EU customers may no longer have the scale to operate profitably in the UK, and so exit altogether.
The impact of Brexit on the financial services sector will vary dramatically with how much access to the EU is retained. A high access scenario is likely to minimise disruption to the sector, benefiting customers who have come to rely on the UK as a uniquely skilled and connected centre for financial services. It would also enable the UK to maximise the growth opportunities that could arise from a Brexit as well as the continuation of the UK as a centre of regulatory excellence.
In a low access scenario, the impact is likely to be much larger and could magnify losses.
The other side
However, banks, insurers and asset managers have come to the conclusion there is no realistic chance of maintaining full passporting rights after Brexit that would allow them to sell all their services across the 28- nation bloc from Britain. Thus, Britain’s finance industry has given up on efforts to keep full access to the European Union after Brexit and is pushing instead for a more limited trade deal that could potentially exclude some financial products.
In a recently published report, TheCityUK, the country’s most powerful financial lobby group, called for limited market access for some finance sectors based on a pact, in which Britain and the EU would accept each other’s rules. This would keep the door open for cross-border trading of stocks and bonds, and sales of certain other products.
There is likely to be fresh scope for exploring opportunities arising from new networks of trade and investment agreements that the UK will negotiate with its partners. Next generation agreements that embrace market access, regulatory coherence, and a range of new issues have the potential to play a vital role in delivering these benefits. It is, therefore, critical to bear in mind that there is a huge advantage to the UK from aligning with global standards of regulation, as these will prove to be the base on which future agreements will need to be structured.
Featured image: Business Insider