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How will Brexit affect the UK Financial Services Market?

It has been impossible to avoid the myriad of debates and accompanying hyperbole concerning the EU referendum. The situation and the decision, whilst complex, appear to be more straightforward for UK banks where globalisation and regulation have been a theme of the last decade. To the majority of senior UK retail bankers, the devil you know appears to be a far better bet than the devil you don't.

Undoubtedly Brexit could have a significant impact on financial institutions in the UK and the rest of the EU such is the prominence of London in world financial markets. The EU already has policies in place that give non-EU countries limited cross border access to the financial markets. Countries with European Economic Area (EEA) membership have full access but can only look on while full EU members continue to write the rule book. It is expected that the UK would assume membership of the EEA - not a great place to be and a position that may negatively influence London's standing as the financial hub of Europe.

So how the UK Financial services sector would be impacted by a Brexit vote is not clear with the extent of any change very largely dependent upon the nature of the arrangements put in place post-Brexit to govern how banks and financial institutions would continue to access markets on a cross-border basis. We can only speculate at the future structure of the UK's trading relationships with the EU and the rest of the world.

Markets normally fall whenever uncertainty raises its head. The longer any period of EU renegotiation post Brexit, the bigger the risk of an economic downturn. Any fall in house prices, for instance, will be very bad news for UK lenders. It is also unclear how the UK will continue to apply laws that are based on EU financial services legislation.

Coming to EU directives, the UK banking industry has been at the epicentre of major and costly regulatory change programmes. Furthermore Brexit induced changes will be unwelcome although the existing EU policy of only trading with equivalent regimes suggests lighter touch regulation for the UK, whilst possible, is not on the cards.

And then to capital markets, where bankers will be desperate for UK market infrastructure to benefit from the continuation of arrangements that facilitate cross-border access by firms based elsewhere in the EU. Should cross-border pass-porting regimes be lost, UK banks may need to consider establishing new regulated entities on each side of the new EU border.

The EU referendum appears to be a career choice for many Brexit politicians and a once in a lifetime opportunity to leave the EU for many others. Few, however, in the banking industry can see there being a smooth transition with the UK operating as a one country trading bloc in an ever changing world increasingly dominated by the US and China.

ea Change Group doesn't advocate any particular position in this matter but this article, by our head of UK Consulting, Jon Murphy, offers up some points that should be considered as the British public decides on this momentous issue in the next ten days.