Try as you might, and I’m sure many of you have, it’s been impossible to avoid the endless discussions about the Brexit deal and the implications for industries across the UK. With such a lack of certainty, the extent to which, and how the finance industry will be affected, is certainly not clear.
The impact will undoubtedly depend on the nature of the deal, if there is one, and the arrangements that are put in place post-Brexit. However, it is still possible to predict what some of the industry’s biggest challenges are likely to be.
Passporting is undoubtedly the issue that will have the biggest potential impact on the financial services sector. Passporting is the process by which UK-based financial institutions sell their products and services overseas without having to obtain a licence or get regulatory approval to do so. That includes everything from insurance providers, the banks, fintech firms and asset management companies. Data from the Financial Conduct Authority (FCA) shows that there are nearly 5,500 UK-registered firms that hold at least one passport to do business in another EU member state.
With Brexit just a couple of months away, it seems extremely unlike that passporting will continue. There are a number of deals that have been mentioned, such as the Norwegian deal and Swiss deal, that could see the continuation of passporting, but both of those deals seem extremely unlikely. Without passporting in place, UK finance firms will have to seek authorisation to sell their products and services in countries they’ve traded in successfully for years.
The process of obtaining that authorisation is likely to be time-consuming, expensive and heavily administrative, with authorisation to trade in each EU market sought separately. That could be hugely damaging for the industry and could be enough to tempt UK headquartered firms to migrate overseas.
The next crucial problem the finance industry is expected to face is the uncertainty surrounding the regulation of the industry. Progressive regulation has historically been one of the major strengths of the UK finance industry, and more recently, it has been the driving force behind London’s position as the European fintech capital. However, Brexit threatens to complicate matters considerably.
The UK will find itself in the position of having to renegotiate more than 40 years of EU regulations, which will undoubtedly take time. Many firms may not be prepared to endure another prolonged period of uncertainty and instead choose to move their operations elsewhere. Secondly, although the bureaucracy from Brussels was one of the arguments touted in favour of leaving the EU, in recent years, the UK has shown a greater appetite for stringent financial regulations than its continental peers. The likelihood is that a tightening of regulations could have a detrimental short-term impact, although greater regulatory autonomy could potentially prove to be beneficial over the longer term.
A shortage of talent
The third key way Brexit could do lasting damage to the UK’s finance industry is by provoking a mass exodus of the world-class talent the industry currently relies on. At present, London, which is very much at the centre of financial services industry, benefits from having a highly skilled, industry-specific talent pool on its doorstep. Brexit could bring serious disruptions to that talent pool, with issues such as visa uncertainty and potential job losses, certainly in the near term, coming to the fore. The result could be that the top talent chooses to go elsewhere.
On the visa issue, a recent report by the City of London suggested that if the current visa system was rolled out to EU migrants, only a quarter of those living and working in London would meet the requirements. That would be a big issue for the finance industry, which relies heavily on talent from the EU.
A pessimistic outlook over the short-term
Although everything is yet to be decided, given the challenges discussed above, it’s difficult not to be pessimistic about the impact of Brexit on the UK’s finance industry over the short-term. Mike Smith, the director of the fintech platform Business Expert, was asked what he thought the impact on the industry would be:
“It’s hard to imagine how Brexit will not have a detrimental impact on what have been the principal drivers of the finance industry in the UK. I certainly don’t think London will lose its place as a financial centre, but I do think a number of firms will choose to move elsewhere. There has already been a shifting of some of the back-office functions of some investment banks and I expect that to be a sign of things to come.”