On Monday evening, I attended a lecture on the potential impact of Brexit on the UK financial services sector (“Report,” link). The Report was produced by Oliver Wyman and commissioned by TheCityUK. The presentation covered the current state of play of financial services in the UK, different scenarios for single market access, and some key recommendations for businesses and professional advisers.
Current state of play
- The UK financial services sector earns approximately £190-205BN in revenues, and of this, up to £50BN is directly related to European Union activity. (Domestic business and other “Rest of World” interactions were not considered).
- Together with the 1.1 million people working in financial services around the country, the sector generates an estimated £60-67BN of taxes each year, and contributes a trade surplus of approximately £58BN to the UK’s balance of payment.
The five important features of a successful future relationship between the UK and EU will require the UK to (as recommended by Oliver Wyman): adhere to global norms, retain current access to international markets, maintain/create equivalence and grandfathering, implement orderly transition arrangements, and maintain ongoing regulatory collaboration.
The speaker and co-author of the Report (Lindsey Naylor) emphasized in particular:
- We will still play by the rules. European financial regulations are themselves part of global regimes and norms (Basel III/IV, WTO). Although the UK will no longer be required to adhere to EU law, there is unlikely to be a “burning of rule books” on Brexit eve.
- It’s not the destination, but the journey. It will take time to settle the new legal relationship between the UK and the EU, and formulate specific regulations. Clear transition agreements are in Oliver Wyman’s view critical to minimise any threat to financial stability, as well as growth and competitiveness.
- Special Relationships? There will be opportunities arising from new networks of trade and investment agreements for the UK to negotiate with its partners. Ms Naylor noted that in her view, the Trump Presidency is likely to influence the future of London’s continued status as a global financial hub.
- Hope for the best; plan for the worst. Professional advisers are encouraged to anticipate scenarios for both high and low access to European markets – see below.
Impacts of Brexit and their associated risks
The Report examined key industry groups within the Financial Services Sector, and provided a sample of ecosystem impacts and risks. By way of example, the impacts for Financial Technology companies include less activity, fewer consumers in the UK, and fewer employees to develop and produce new technologies. The associated risks for FinTech include slower rates of improvement in the services provided to clients, and alternative hubs emerging across Europe that benefit from future growth opportunities. It was however considered that no single alternative for such a hub is “heir apparent” to London, although likely destinations are Frankfurt and/or Luxembourg.
High and Low Access Scenarios
High Access scenario: at one end of the spectrum, an exit from the EU that puts the UK outside the European Economic Area (EEA), but otherwise delivers passporting and equivalence and allows access to the Single Market on terms similar to those that UK-based firms currently have, will cause some disruption to the current delivery model, but only a modest reduction in UK-based activity.
High Access outcome: Oliver Wyman estimate that revenues from EU-related activity would decline by ~£2BN (~2% of total international and wholesale business), that 3-4,000 jobs could be at risk, and that tax revenues would fall by less than £0.5BN per annum
Low Access scenario: At the other end of the spectrum, in a scenario that sees the UK move to a “third country status” with the EU without any regulatory equivalence, the impact could be more significant. Severe restrictions could be placed on the EU-related business that can be transacted by UK-based firms.
Low Access outcome: In this lowest access scenario, where the UK’s relationship with the EU rests largely on World Trade Organisation (WTO) obligations, 40-50% of EU-related activity (approximately £18-20BN in revenue) and up to an estimated 31-35,000 jobs could be at risk, along with approximately £3-5BN of tax revenues per annum.