Impact of Brexit on
Britain’s Financial
Centre
January 26, 2021 @ 18:07 +03:00
London as the Centre of Financial Services is threatened
With Brexit, the position of Britain, and particularly London, as the financial centre of Europe has become uncertain. As it stands, the UK is set to lose the privilege of selling its financial services in Europe after the Brexit transition period ends. The UK financial industry is hugely important to the country, making up 6.9% of economic output in 2018. However, since the announcement of Brexit, firms have transferred €1.3 trillion in assets and 7,500 jobs to the EU, according to Ernst & Young. Additionally, many other European financial cities such as Frankfurt, Dublin and Paris are already eyeing London’s central place as the international hub for global banks, asset managers, insurance firms and hedge funds. With Britain set to leave the bloc on 31 December 2020 at the end of the transition period, negotiations are ongoing to resolve important issues. However, the future of many global financial firms is still hanging by a thread as many issues and details remain unresolved.
Losing Passporting Rights
Many banks are letting their customers know that their accounts will be closed, as global financial firms in London lose their so-called passporting rights. These rights refer to the European Union’s passporting system for financial institutions, which enables them to trade freely in any other EU or EEA state with minimal additional authorisation. Passporting rights are an essential part of the EU single market for financial services.
For the last 24 years the scope of the EU single market has expanded to include an EU rulebook for financial services and the increased standardisation of regulation across the EU. Within this context, a financial services firm or bank, which is authorised within the EU or has branches in other EU countries, can apply certain services throughout the EU and this authorisation is its passport to provide these financial services.
For example, third country firms are not eligible for these passporting rights and face regulatory barriers in their cross-border banking and investment activities.
These passports enable the smooth performance of trade in financial services across the EU. Many UK-based financial services’ businesses have developed their business models on this specific EU legislation to “passport” their services across the EU and the EEA. Therefore, it is very important for the UK, as it is the largest exporter of financial services inside the single market. In 2014 alone, the UK exported over £20 billion of services to customers in the EU and provided hundreds of billions of euros in finance.
Without passporting rights the services that banks in the UK will be able to provide will be restricted. For this reason, customers could turn to other banks based within the EU, while UK banks could relocate into the EU those services which they are no longer able to provide.
London might not lose its status, but its primacy will be hurt
While London will remain the financial capital of Europe, its primacy will be battered, as the market for financial services becomes more dispersed, creating friction and added costs. Despite this, many feel that financial stability won’t be lost in January, as most firms have prepared for an expected market volatility post-Brexit.
JPMorgan is planning to move 200 employees from London to Paris and Frankfurt, with a further 100 workers expected to move next year. JPMorgan also plans to shift 200 billion euros in assets to Frankfurt, while Goldman Sachs plans to transfer between $40-$60 billion to its German subsidiary by the end of the year.
For all the Brexit cheer and celebration of Britain’s liberation from the shackles of EU regulation, the result has been, at least for the financial services, added aggravation, uncertainty and money scattered to Frankfurt, Luxembourg, Dublin and Paris. London might still be the financial hub of Europe post-Brexit, but at what cost?
