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How will Brexit impact financial services firms?

Created: April 2017

Short answer: no one really knows. Brexit remains a moving feast and we won’t have all the answers for some time. But the financial sector is used to dealing with complexities – it’s all about asking the right questions in order to prepare for (and even profit from) any eventuality.

In this blog we’ll address the pressing concerns for financial firms over the next few years and how Brexit could shape their strategies.

What will Brexit actually look like?

When Article 50 is triggered is it will take at least two years for the UK to fully exit Europe. One thing is certain: the City and the Government are committed to ensuring the UK remains a member of the single market.

The most favourable precedent is the so-called ‘Norway model’ whereby the UK re-classifies itself as a European Economic Area (EEA). This allows the country to retain the benefits of free trade, while loosening the political and legislative hold of the EU.

The Swiss have a different model, but their continually renegotiated bilateral agreements are a headache and don’t allow full access to the EU’s internal market. In fact, historically Switzerland has generally opted to do banking by ‘passporting’, often via the UK…

How will financial regulation change?

Passporting is the big area of concern for the City. Currently UK financial institutions are free to sell their services to any other EU member state. Non-EU firms often establish a presence in the UK and use passporting to sell into the EU.

If passporting were to cease, the City would stand to encounter regulatory hurdles while operating in mainland Europe. While not impossible to overcome, these could certainly impede efficiency while firms without an existing presence set up on the continent.

Business as usual?

The UK will still need to follow EU rules to do business. It just won’t be able to influence them. Fortunately, the UK’s interests will likely remain closely aligned to the EU and we do not expect to see much financial legislation amended or repealed.

UK-based institutions already need to comply with key pieces of legislation to remain within the EEA. In any case, a lot of financial legislation is set by global regulators and the UK often has higher standards than the EU.

Post-Brexit, the City will continue to adopt the majority of EU legislation whether compelled by the UK government or not. If the UK were to relax the rules in any area, some firms may still opt to forgo any efficiency advantages in order to retain access to the single market.

Will financial institutions desert the City?

If passporting rights are lost, firms may decide to establish subsidiaries on the continent. Similarly, foreign banks could seek to relocate to Ireland or across the channel.

However, market forces won’t change overnight. The City boasts a world-leading pedigree of financial services, underpinned by generations of accumulated experience, skills and technology – further assisted by language, timezone, legal system – all of which are difficult to replicate.

Will Brexit cause a drain on human resources?

Brexit could put the brakes on free movement of people, causing problems for many businesses as well as the financial industry. Other financial centres could become more attractive propositions to established specialists and the upcoming generation of talent.

The UK government will have a difficult balancing act to allay voters’ concerns about immigration while negotiating concessions with the EU to address the economic imperative of attracting and retaining skilled personnel from the mainland.Brexit on the bottom line

Currency fluctuations will be beneficial or detrimental, depending on your business. Looking beyond the dramatic short term fluctuations following the referendum result, lengthy negotiations and continued uncertainty could depress the value of Sterling for some time. For those who earn in dollars, for instance, the weaker pound could bring a net gain.

The opportunity

With upheaval comes opportunity. UK firms can gain an edge on domestic competition by proving their flexibility and expertise, rapidly adapting to different regulatory environments and implementing new technologies and processes to ensure compliance, whatever the outcome.

Being free from the more irksome aspects of EU legislation, such as restrictive employment rights, could create a more dynamic and competitive environment in which to reaffirm the City’s prominence versus the US and Asian financial centres.

Bilateral trade agreements with emerging financial centres, such as Hong Kong and Singapore, also have the potential to offset any short-term pain and support long-term wealth generation.

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