By Veronika Sherova
Your commercial awareness dose
The financial services sector is a significant contributor to the UK income and employment. According to the House of Commons Library in 2018, the financial services sector contributed over £132 billion to the UK economy, which is counted for 6.9% of the total economic output. Moreover, the sector generated over a million jobs all over Britain, with two thirds (66%) of it located outside London. Notwithstanding the importance of the sector, the UK-EU deal doesn’t include an EU-wide arrangement for financial services and hence has done little to maintain stability in the sector.
After Britain has confirmed its intention to leave the European Union, the EU ruled out specific arrangements including the so-called passporting system, operating with the fact that the system is preserved only for member states. Passporting allows the financial businesses authorized in any of the member states to operate at ease across all the European Economic Area. UK now lost its advantage.
A recent report estimated that nearly 5,500 firms in the UK rely on passporting to conduct business with the rest of the EU. Considering that the export of UK financial services was worth of £60 billion in 2017 and 43% of this amount went to the EU, it can have a direct negative impact on the UK economy. Brexit means not only additional trade tariffs, it is about whether UK banks have the legal right to provide services to the EU member state’s businesses and citizens and vice versa.
From the 1st of January, the financial sector firms will have to rely upon regulations of individual member states. However, the exclusion has left a room to “equivalence”, which would allow the UK market access to the EU financial market but only to a limited range of services. Brussels will grant regulatory equivalence, only if Britain shows that its regulatory regime for financial services as effective as that one of the EU.
However, the equivalence agreements depend on continued compatibility between regulatory outcomes, they are subject to continuous revision and can be withdrawn within a month’s notice. And even if Brussels will grant it to the UK it will not maintain pre – Brexit cooperation also because it is very unstable. For instance, the EU recently withdrew the equivalence from Switzerland due to the arrangement delays. The trade deal however outlined plans for negotiations to discuss future financial services arrangements. Both sides confirmed their intentions to reach an agreement with a deadline set in March.
Since the Brexit vote, British financial firms have set up new offices across Europe and have moved assets to avoid disruption. Accounting firm EY estimates that more than £1 trillion of assets have been moved from London to the EU since 2016 as a result of Brexit. Consequently, over 7500 jobs have been lost to the EU member states. And this number could be even higher if only the lockdowns hadn’t forced to relocate many job positions from offices to homes.
Notwithstanding the crucial effect of the pandemic and the EU-UK divorce, London is still the second largest financial center (after New York) according to the Global Financial Centres Index as of March 2020. To help maintain the position Britain allows EU firms to remain for 3 more years on the pre – Brexit basis hoping that they will apply for permanent UK authorization. Being a second financial hub with all the necessary infrastructure and skilled workers, it’s possible to assume that the UK’s hopes will pay off.
The importance of the UK financial sector to the EU is also explicit – the financial sector has been one of the principal benefactors of the single market, the union is strongly based on economic motivations. British banks lend nearly £1.1 trillion to EU companies and governments. Much of the financial activities carried out in Europe are either directly or indirectly performed out of London (87% of US investment banks’ EU staff are employed in London). For the EU the Brexit deal will only be a stimulus to develop its own capital market and cut reliance on Britain’s financial services and the city of London.
Donate & Support