With the Brexit deadline less than a month away, much remains uncertain. Will it be possible for the government to reach a deal within such a short space of time? Will we have a hard Brexit? Or, will life simply go on without much impact? It’s impossible to know.
We take a look here at some of the possible outcomes. Yet, the important thing to remember is that, at this point, it’s all speculation and we’ll need to wait til at least the March 29th deadline to find out more!
The UK’s Financial Service and Asset Management Sector
According to an April 2018 report, financial services contributed £119 billion to the UK economy in 2017, roughly 6.5% of the country’s total economic output. In 2016, the UK exported financial services worth £61 billion with 44% of exports going to the EU and 39% of financial service imports coming from the EU. As these figures suggest, the UK and EU have a very close relationship when it comes to financial services. So, it’s in both parties interests to reach favourable trade deals.
Potential Brexit Impacts on the UK’s Financial Services
While much remains uncertain and it’s nearly impossible to predict the potential implications without details about trade deals, we might see the following impacts:
- Different trade relationships with the EU
- New, possibly stronger trade deals with non-European countries
- European cities, like Frankfurt and Paris, trying to compete with London on the world FS stage
- Continued trade regulations on non-European countries wanting preferential treatment
- The UK could promote FS by lowering capital requirements, easing taxes and loosening labour laws
- New agreements with emerging financial centres in Asia like Hong Kong and Singapore.
What are the UK’s Options for Trade with Europe?
The potential impact on the UK’s financial services primarily depends on secured trade deal. Throughout the last two years, politicians have proposed various trade models such as:
European Economic Area (EEA)
Also known as the Norway model, the EEA already exists and allows for relatively easy trade between EU members and the non-EU nations of Iceland, Liechtenstein and Norway. As part of the EEA, members trade on the single market, but non-EU countries must contribute to EU budgets and follow EU laws like free movement.
European Free Trade Association (EFTA)
Also known as the Switzerland model, the EFTA model is currently used for free trade between Iceland, Liechtenstein, Norway and Switzerland. EFTA members can opt to join the EEA, which would allow the UK to access the single market. Switzerland, which did not take this deal, had to negotiate free-trade agreements for specific areas and pay for access to the single market.
Comprehensive Economic and Trade Agreement (CETA)
Also known as the Canada model, the CETA model has allowed Canada to secure preferential access to the EU’s single market without having the same level of commitment as EEA nations. But, the CETA is only really applicable for the trade of goods so it isn’t necessarily suitable for the UK’s financial service industry.
World Trade Organisation
The World Trade Organisation, or WTO, are a world-wide set of regulations to govern trade between countries with no pre-existing trade deals. Under this model, the UK would need to use the ‘most-favoured nation’ approach which would require the EU and UK to use the same terms and regulations as they do when trading with other countries. Some argue that WTO model might improve the UK’s opportunities for trade and investment internationally.
The WTO model is probably the most likely trade agreement if a hard Brexit goes ahead. Hong Kong and Singapore, other respectable financial service nations, have used this approach to stimulate growth and the development of their financial systems. On the other hand, it would require us to erase tariffs across the board, which could impact other industries like manufacturing and agriculture.
Bilateral Free Trade Agreement.
Most argue that a custom trade deal would provide the greatest amount of benefits for the UK and the financial services industry. For example, it could allow for relatively unrestricted trade while also allowing the UK to stop contributing to the EU budget. However, using this model would require the UK to relinquish control over EU regulations and policies, which could impact companies in financial services.
Finding a trade model that provides the same benefits as our current model without compromising on other policies, like the free movement of people, is certainly not an easy task.
What Happens with a No-Deal Brexit?
In this case, the UK intends to use a Temporary Permissions Regime so that EU banks and financial companies can still maintain their passporting rights, allowing them to continue operating in the UK market for three years. This would also protect clearinghouses and insurance contracts.
Politicians hope that this internal arrangement will allow for “equivalent regulations” in Europe for UK financial service companies, but whether or not this happens remains unknown.
How the UK’s Financial Services is Preparing for Brexit
Banks and financial institutions have made plans to mitigate the risks of a hard Brexit. As much remains unknown, these plans simply act as contingency in a worst-case situation. For example, the Royal Bank of Scotland has established a £2 billion fund to help small businesses and some EU-based banks, like Handlesbanken, have secured UK banking licenses to ensure that they can continue to operate.
How Brexit will Impact Recruitment in the UK’s Financial Service
The financial services sector currently employs 1.07 million people with 11% based in Scotland. Across the industry, many companies are making sure they have the relevant entities in place and analysing the financial impact on cross-border transactions.
Rather than slow recruitment, the increased uncertainty around Brexit places an increased need for employees with certain skills like international taxes and statutory accounting. Companies may also hire FS employees with a second language or international experience to help ease the transition and build stronger relationships with EU firms.
Until the UK government reaches a concrete deal, it remains impossible to understand the potential impacts, and we must keep calm and carry on.
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