The UK economy after Brexit: what’s next for financial services?
What is the state of the UK economy after Brexit? Trade was undoubtedly hit hard, and the shortage of workers caused disruption. Economists, however, disagree over precisely how the UK economy has fared since officially leaving the EU in December last year. This is mostly due to the fact that any possible damage caused by Brexit has become blurred with the impact of the pandemic. Can labour shortages be blamed on the end of free movement, or lockdown restrictions? Most likely, it is the case that Brexit and Covid-19 combined have created, and exacerbated, challenges.
More uncertainty remains for the financial services industry. The industry was seldom mentioned in the UK-EU trade deal, despite employing over one million people and contributing £132 billion to the economy in 2019. Last month, following continued Brexit uncertainty, Rishi Sunak delivered a speech intending to establish the state of the economy and the future of financial services in the UK. But did this provide any clarification?
In light of the chancellor’s speech, we provide a back-to-basics summary of the impact of Brexit on UK financial services. We also round up what’s next for the industry now that we have left the EU.
What do we know so far about the UK EU trade deal for financial services?
When it comes to Brexit and financial services, there was one main question on the mind of the industry after the UK announced its departure from the EU: would financial services in the UK still be able to access the EU’s single market?
The answer, it has emerged, is no. When the UK was part of the EU, financial firms were able to export their products and services to the EU without needing any specific license, authorisation or going through additional processes. This was down to a system called passporting. Brexit means that the industry has now lost these rights, making access to the EU single market more difficult.
To soften the blow, the UK government has been attempting to secure an equivalence agreement with the EU. If you’re not already aware, equivalence refers to a system whereby UK financial services can continue to have EU market access on one condition – that the regulatory regimes of both countries are equivalent. So far, the UK has been unable to negotiate an equivalence agreement.
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The Brexit impact on UK financial markets
As a result of losing passporting rights, and with equivalence looking unlikely, what do we currently know about the impact of Brexit on UK financial markets? Research by New Financial indicates that:
- Over 440 banking and finance organisations have left the UK and relocated to the EU
- Approximately 10% of UK bank assets (totalling over £900 billion) have moved, or are in the process of moving, to the EU
- 7,400 financial services jobs have moved, leading to concern that new jobs may be created in the EU rather than the UK in the future
Amsterdam has also replaced London as Europe’s biggest financial trading centre.
But is it all bad news? Some experts believe that the UK is still the most attractive destination in Europe for financial services. While there has been a significant dip in foreign investment into UK financial services projects, the UK did receive more investment than other European countries. The decline has also been put down to Covid-19 disruption, adding to the uncertainty surrounding the actual Brexit impact on UK financial markets.
What’s next for UK financial services?
On July 1st 2021, Rishi Sunak delivered his Mansion House speech. The speech aimed to clarify the future of financial services in the UK and the government’s plan to achieve this. The chancellor also published his strategy document, ‘A new chapter for financial services’, which outlines the key points of his speech in further depth.
The UK government’s vision for the industry highlights the following areas:
- Regulation - While the chancellor confirmed that the UK and EU have failed to reach any decisions on equivalence, he asserted that the EU will not be able to ‘deny the UK access because of poor regulatory standards.’ The government also plans to further strengthen the industry’s regulatory regime, suggesting that changes within financial services regulation can be expected.
- Global ambition - The government intend for the UK to remain an ‘open and global financial hub’ and cite new relationships with Singapore, the United States and Switzerland as evidence of this vision.
- Technology - Innovation and cutting-edge tech is seen as the way forward for the industry. The government have stated that they will support financial services in the UK to adopt new technologies, and are exploring FinTech recommendations and the possibility of a new digital currency.
- The environment - The chancellor discussed plans for the UK to focus on green finance. Future financial initiatives will need to better protect the environment, for example by considering climate change in decision making processes. It’s also about considering how finance and investments may be affected by the environment.
While Rishi Sunak’s speech and roadmap indicates the UK government’s intentions and priorities going forward, the ultimate state of the UK economy after Brexit remains to be seen. It’s likely that the true impact will not be known for years to come. In the face of continued uncertainty, discover how our cutting-edge software can support financial services to transform compliance processes, streamline internal audit, remain resilient to risk, and boost operational performance.
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