Brexit White Paper Deep Dive – What Are The Implications For UK and EU based Financial Services?

Brexit White Paper Deep Dive – What Are The Implications For UK and EU based Financial Services?

Yesterday, we described the circumstances relating to the release of the UK governments much anticipated White Paper, which outlines how the UK intends to go about leaving the EU on 29th March 2019, and briefly described some of the ways that Brexit is expected to disrupt international trade between the UK and EU. Today let’s look at financial services in more detail.

Already, the White Paper seems to be subject to considerable change. Now that it is in the hands of government ministers, EU officials in Brussels, and key stakeholders like Irish Prime Minister Leo Vardaker, cracks are beginning to emerge; but perhaps that is to be expected. When dealing with Brexit, it is always important to remember that there is no precedent for a country leaving the EU, and therefore no clear path forward. Perhaps, as many people hope, it will never happen. But, for now, it is still a good idea to be prepared for an exit scenario.

From a currency perspective, the Brexit effect has been nothing short of disastrous, with the pound dropping nearly 30% against the euro and the dollar since the referendum on 23rd June 2016. All the more reason for always looking to get the best deal when you are making transfers of money overseas. Using The Money Cloud to discover the best rates offered by leading brokers and money transfer agencies could save you as much as 80% on fees, per transaction. It’s easy to use and guarantees you get all the facts before making a decision that can save you a substantial sum.

Let’s look briefly at how Brexit might affect the financial services industry. The government’s White Paper stresses the size of the UK’s financial services industry; UK-located banks underwrite half of all the debt and equity issued by EU based businesses, as well as over half of the over-the-counter interest rate derivatives traded by EU companies and banks.

The UK manages more than £1.4 trillion of assets on Europe’s behalf, the paper states. It is home to the world’s 20 largest re-insurance companies, and books more international banking activity than any other country.

But for how much longer? It has been well documented that many international banks are considering moving their operations out of the UK and relocating to a more favourable post-Brexit environment such as Frankfurt, or Paris. The UK, however, counters with an argument that suggests its banking industry is “too big to fail”. The International Monetary Fund (IMF) has described the UK’s financial stability as a “global public good” – would it be simply too risky for banks to uproot their core services and start to move them elsewhere?

One of the key issues is that, having left the EU, the UK would no longer be able to “passport” their services into the EU, i.e. do business within the EU without being subject to extra regulatory checks. This right is something that international banks treasure and may persuade them to move their operations from London back inside the EU, since the UK is determined to leave the Single Market, and forfeit its passporting rights.

The UK has decided that it wants to preserve its autonomy of decision making and the ability to “legislate for its own interests”. In order to manage its financial stability exposure, the UK says that it will “need to be able to impose higher than global standards”.

It seems that the UK is “banking” on something called “equivalence”. Equivalence could be described as not quite the ability to “passport” into anywhere in the EU without being subject to regulation, but very nearly. Equivalence recognises the fact that it is both the EU and the UK’s interests to more or less maintain the status quo when it comes to the provision of financial services. Neither side appears keen to tinker too much with the existing framework.

The UK already has equivalence deals in place with third party countries, which has the dual benefit of both making doing business less bureaucratic, but giving the UK and its counterparty a kind of power-of-veto and the ability to make autonomous decisions.  In the paper, the UK states that it’s ambition is to do similar with the EU, recognising that it is “more deeply intertwined” with the EU that elsewhere, but demanding the power to make autonomous decisions nonetheless, and grant the same powers to the EU.

The UK says that a “new economic and regulatory arrangement with the EU in financial services” will “maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU.”

It states that “This new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation.”

At this stage in the Brexit negotiations, the fate of financial services is not the subject of the fiercest discussion, which suggests that both parties are willing to embrace the idea of “equivalence” in the interests of maintaining things as they are. Things will start to get interesting, however, whenever the EU or the UK decides to pursue its right to autonomy, and could escalate quickly.

Financial services are of huge importance on both sides of the channel, and if one side is perceived as taking advantage of the other, then diplomats, law-makers and politicians will have their work cut out to find fast and fair solutions. As things stand, however, there are reasons to be optimistic that mature and lasting solutions can be found and that vital financial services interests can be protected. Europe and the UK, after all, do not want to lose market share to the rest of the world when it comes to enjoying pre-eminence in the financial services space.

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