Financial Services sector comment – November 2017

Brexit effects on the financial services market

Whilst the ongoing uncertainty over the actual form and time of Brexit continues to impact the UK economy generally its potential effect on the financial services sector are significant. As the leading European financial services centre, the UK has much to lose out on. Financial services currently provides 7.2% of the UK’s Gross Value Added, and is the 5th largest market in the world  with 22% of overall banking revenues coming from international sources.

Currently the UK enjoys the title of the most attractive destination for foreign financial services investment, its dominance over Germany and Paris is complete, with the US and China in particular being attracted by its level of expertise, sector leadership and a vibrant fintech eco-system. This position is potentially under threat after Brexit with overseas investors being concerned over lack of EU market access and potentially increased tariffs being put in place rendering the UK uncompetitive.

Where to locate company headquarters is not quite as easy a decision as it was until very recently. Many businesses naturally chose the UK but now the question is wider as they must ask whether to establish an EU branch or subsidiary. With an EU subsidiary, the business could continue to take advantage of existing EU Passporting rights. We’re already seeing firms begin to move operations across to the EU such as the Japanese bank Nomura, which has chosen Frankfurt for its EU headquarters following the Brexit vote, and investment banks Morgan Stanley and JP Morgan which have announced are likely to move between 15% – 25% of staff to offices in Dublin or Frankfurt.

Being outside the EU has yet more repercussions to consider as banks face having to put additional capital into the business as well as increasing regulatory complexity. If the UK does not hold Passporting rights to perform activities in EU countries, firms will need home state regulatory authorisation. This will result in an on-going need to comply with new EU regulation. With potential clashing regulatory rules between countries, the UK risks having to adopt terms it does not necessarily agree with to be able to continue to conduct business overseas.

Brexit could also impact the ability to hire talent from overseas. Currently a significant proportion of employees in the UK financial services sector are from outside the UK. Travel obligations and visa requirements are contributing obstacles to consider when recruiting outside the UK and vice versa for UK firms deploying staff to EU branches.

Of course Brexit may not be all bad. The UK’s traditional strengths in financial services, innovation and highly skilled workforce will all still be present post-Brexit. The UK is a global financial services leader and as such services will continue to be sought after. With suitable free trade agreements in place the UK may be able to access a whole raft of new opportunities worldwide. With a flexible and effective regulatory regime in place and investment behind the UK financial services sector, being outside the EU may ultimately provide more growth than being within it.