Brexit and Financial Services – What Do We Know So Far?

The Brexit negotiations are still rife with uncertainty and speculation, and with the president of the European Commission confirming that the talks won’t begin between the EU and UK until after the general election – no one is any clearer on the true impact that the separation will cause.

 

While it would be difficult to compile a price on the cost of Brexit so far, or what it will reach, there have been a large number of reports written on the impact of the shock decision with regards to new tariffs and the restriction applied to the movement of individuals.

 

So far, we know that almost instantly, the decision to leave the EU caused the pound to undergo the biggest 24-hour fall against the dollar on record, as traders were betting that the consequence of Brexit was going begin a long-standing economic cost for the UK.

 

The pound has never fully recovered from the blow it suffered last June; the depreciation provides benefits for those exporting from the UK but means that the cost of importing has risen dramatically. This, in turn, has caused domestic inflation to rise faster than employee’s pay, applying pressure on living standards that can be felt the width and breadth of the country.

 

Of course, business investment has too suffered since the decision to leave the EU was made. Organisations cannot provide any clarity on future trade agreements with the EU due to the impending changes to tariffs; experts have predicted that the total cost of those tariffs could range from 2% to 9% of GDP.

 

Charles-Edouard Bouée, the CEO of Europe’s largest management consultancy Roland Berger has already warned his clients against investing in Britain.

 

UK business investment dropped by 0.9% in the last few months of 2016; the first calendar fall in seven years. The Bank of England has predicted that by 2019, the level of business investment will be around 25% lower than forecasts made before the referendum, detrimental to productivity growth. However, British consumers have shown themselves to be particularly resilient post-vote, and this ensured that the UK has avoided a recession so far, but with rising inflation, the resilience is now wavering.

 

As retail sales fell by 1.4% in Q1 of 2017, prices rose in a number of other areas including clothing, household fuel and council tax.

 

At the beginning of the year, the CEO of the London Stock Exchange Xavier Rolet, cautioned that failing to provide clarity on the post-Brexit future could mean that more than 200,00 jobs in London would be lost.  The cloud surrounding the operational strategies of the financial hub could mean that firms begin to move their operations out of the City.

 

To echo this, Douglas Flint the chairman of HSBC, also called for more transparency in the negotiations to prevent thousands of jobs, including those within HSBC, being moved elsewhere. Comparing London’s financial arrangement to a ‘jenga tower’, he stated that, “you don’t know what will happen if you pull one small piece out – it might have a big impact”.

 

Many of the large firms with offices in the UK also have operations in EU member states, and are pre-empting moving their employees there; and those who don’t currently have already spoken out about their plans to open European units to counter the possible implications of leaving the EU.

 

Many firms involved in financial services are urging for a soft Brexit, fearing that the alternative will see the UK leave Europe’s single market – landing a devastating blow to the city’s position as a global financial hub.

 

Leaving the single market would mean that financial services firms in the UK would lose passporting rights – these rights allow access to the European market and retaining them is central to the continued success of the financial sector in the UK.

 

For those companies that offer financial products such as loans, it’s predicted that the change would revolve around legislation, but again, experts are unclear to the extent that the government will retain any EU derived law.

 

Andrew Wayland from Everyday Loans comments, “While the UK remains as a member state we don’t expect to see much change to current legislation surrounding the products that we offer. Much of the UK law is derived from the EU, and within the industry, we are hoping to see any changes to this mimic the current legislation to ensure that financial firms in the UK have a level playing field, allowing them to operate successfully. This has already been proven to work, having already been executed in Switzerland. However, what we do predict is that there may become a further demand for our services as the pound fails to reach its previous levels, and households begin to feel the pinch of rising costs.”

 

We are yet to see what the negotiations will bring, while some are confident in the Governments committed support to maintaining the prominence that the UK has in financial services, the length of time the negotiations are expected to take could be the undoing of the sector as we know it.