The implications of Brexit on Financial Services

There have been innumerable essays, reports, accounts, books, analyses and more surrounding Britain’s membership of, and exit from, the EU in the last few years, but nothing on The Student Investor! I will rectify this today by writing an article on Brexit and its implications on financial services in the U.K., an industry I’m sure many of our readers and members seek to enter following their degree. So, hopefully this will be a relevant and useful read.

For those of you that have rather skilfully avoided every news site for the last five years and then found yourself on our blog page, Brexit is an abbreviated term describing Britain’s exit from the EU, which we voted for, as a nation, in the 2016 referendum. However, it was only a month ago that we finalised our departure, after Boris Johnson secured a last-minute trade deal outlining how we will continue to trade goods and services with the bloc from 1st January 2021. The trade deal is 1,246 pages long, so I won’t even try to cover the ins and outs of it. Instead, this article will summarise what it potentially means for financial services, and what the future may hold.

The Brexit trade deal is a lot of things, but what it is not is a deal that benefits the financial services industry. It is now clear that in the months before Christmas, the delay in striking a Brexit deal was due to a dispute on fishing rights, a sector that generates 0.04% of U.K. GDP, while financial services, which generates over 7% of GDP and accounts for more than 1.2 million jobs prior to the coronavirus pandemic, according to the Financial Times, was almost completely neglected. City executives, who continue to raise their concerns regarding Brexit, were hoping for a deal that included the continuation of what is known as ‘passporting.’ This term refers to full market access to the EU, which foreign banks, insurers and other city firms have enjoyed up to now. Despite the concerns voiced by major banks about losing this access, it was not included in the trade deal and has been replaced by an EU system known as ‘equivalence.’ This EU system grants access to foreign banks and financial firms based on whether the regulations of their domestic financial sector are ‘equivalent’ to the regulations set by Brussels. This is markedly different from the free access the British financial services sector enjoyed in EU markets previously, as it excludes many sectors such as retail banking and crucially, this equivalence system is only temporary, and can be removed with only a month’s notice. Given that the U.K. government has previously suggested regulations surrounding the financial services sector could deviate from the EU’s in the near future and the fact that nearly half of the City’s customers come from the EU, this could create problems for the industry that has been the powerhouse of our economy for so long.

Since 1st January 2021, when the U.K. officially left the EU, the EU has yet to declare many areas of the financial services industry ‘equivalent,’ with only two areas granted full temporary market access. Therefore, it remains to be seen whether more financial services will be granted this ‘equivalence,’ as the direction of financial regulation in the U.K. is still unclear. Although any changes to the rules could be deemed unnecessary, given the success the City has enjoyed under the current rules, one of the main reasons behind leaving the EU was to have greater autonomy from EU regulations, therefore, politicians may relish in the newfound freedom to deviate.

What does this mean for foreign banks and other firms that have operated in London for decades?

In the four years since we voted to leave the EU, there has been huge speculation regarding the future of the City of London as a global financial hub. Many predicted a significant migration of jobs into European cities such as Paris and Frankfurt, as well as the transferal of assets into markets outside of the U.K., drastically reducing the global reach of the City. However, so far this has not transpired, and it is unlikely to happen in the short-term. Although, according to the Financial Times, over 10,000 jobs have moved from the City to other EU hubs since the Brexit vote, this is merely a drop in the water of the 500,000 people that work there. This is also markedly fewer than what many banks projected. Take J.P. Morgan as an example. Following the 2016 referendum, they stated that up to 4000 jobs could be moved out of London in the short-term, but in reality, their headcount remains largely the same, according to the Financial Times.

Ultimately, in the near future London will remain Europe’s main financial hub; a global powerhouse like this cannot merely disappear overnight. But there is a growing recognition that over the next two to three decades we could see a clear movement of global financial services away from the U.K. capital. The £1.2 trillion of assets that have moved from the City to EU hubs since the referendum showcases the beginning of this movement. This number is significant and could be a sign of where financial activity is heading as the impact of Brexit on the U.K. economy becomes cemented. While, there hasn’t been a vast jobs exodus from the City like many anticipated, major international banks such as UBS, J.P. Morgan and Bank of America have increased the size of their EU offices, a possible indication of where they believe they will see growth in the long-term.

In conclusion, the Brexit trade deal has had an unwelcome reception in the financial service sector due to the potential increase in barriers and restrictions on a previously free-flowing financial market. On the other hand, many of the negative predictions regarding migration of headcount, post-Brexit, have yet to materialise. Therefore, for the foreseeable future, London will still remain a global financial hub, providing an unbeatable place to start a career in finance as part of the world’s most prestigious firms.