The range of potential outcomes remains vast, British-EU trading relations being any one of the following:
- Remaining part of the single market
- EEA membership
- EFTA membership
- A bespoke free trade agreement
- WTO rules
The likelihood of early certainty is low, especially given that both negotiating teams will be under varying political pressure to adopt positions that are contrary to an amicable settlement. The UK, for example, is likely to seek restrictions on migration, a position that runs contrary to the EU’s four fundamental freedoms. The EU might offer stringent terms designed to deter other members from leaving, or indeed look to create a level of uncertainty which encourages UK-based companies to move operations to EU members. However, with increased uncertainty comes an accompanying risk: disruption to normal flows of capital and other crucial services of which the UK is a net exporter, and upon which EU economies are dependent.
The UK has substantial domestic challenges over the next two years, including the precarious party positions in the UK Parliament and what this means for Brexit negotiations*, the long enduring deficit, inflation linked to sterling’s lower value, and the constitutional positions of devolved administrations. The EU also has many potential crises to muddle through within the timespan of the Brexit negotiations. The known ones today include the German elections (2017), the Italian election (in early 2018 at the latest) and the ever-present danger of a Greek/wider euro crisis.
Thankfully, victory for Macron in the French elections has, for the moment, deferred any immediate systemic risk to the EU project. The welcome though belated economic recovery within the Eurozone may also help to make subsequent elections in the near to middle term less risky, particularly if the mass unemployment in Southern Europe is reduced.
The changes in the political landscape will have substantial impacts on any financial services firm. Choosing how to mitigate against the factors with the greatest effects. Understanding the areas of change and their likely direction will help to inform any contingency plans.
What aspects of Brexit will affect financial services most?
For firms that offer a substantial proportion of financial services to the EU or have euro-clearing operations in London, the terms under which Britain exits are most important; anything other than an equivalency regime warrants the movement of operations. Many large players with significant exposure have already indicated the movement of jobs.
Upon exit, Britain will be equivalent in all aspects of EU regulations covering financial services. Britain will be required to adopt EU legislation in all areas until exit, and the Great Repeal Bill will transpose EU laws onto the statute books. This last point is however dependent on satisfactory supervisory frameworks replacing the existing EU bodies.
Despite the letter of the law concerning equivalency (a nation that has laws that can be considered equivalent to EU legislation), it remains to be seen whether the EU will recognise the UK’s legislative regime as being so. This is despite the general proactivity and size of UK regulators in comparison with counterparts in many EU nations. Legislative and supervisory proactivity will be required to ensure that the UK maintains alignment with EU regulations and that scenarios such as the EU-US Safe Harbour Schrems ruling, which threw trans-Atlantic data transfers into jeopardy, are avoided.
This then raises the question, to be decided ultimately by the UK Parliament; Will there be a bonfire of regulations? A gradual divergence? Strict adherence? Or a dual regulatory regime?
Any of the above will create a substantial degree of change – adherence to EU regulations may well result in greater regulatory change than any UK regime.
Access to top talent from abroad
Though the retention of borders open to talent has been broadly hinted at, the ability to easily bring in talent is what ensures London’s reputation as having a diverse, highly skilled ecosystem which surpasses that of many other cities. Any question of future access reduces London’s continued ability to grow, but it is a question over which there is likely to be a greater degree of certainty in the near future.
This ecosystem is also of primary importance to the next generation of growth leaders in financial services – Fintech firms. The ability to secure talent from abroad is vital in moving from start-up to scale-up, though hires from the US and Israel are more likely to be towards the top of the list.
Retaining and expanding access to talent for incumbents and Fintech partners is something for which those in financial services cannot easily create contingency plans. Nowhere in Europe has the same ecosystem or draw for talent and it cannot be easily replicated. The UK government has indicated it’s willingness to allow for the bringing in of top talent relatively simply. However, whereas previously access to EU talent was as easy as hiring a UK citizen, tomorrow’s access to talent will likely create a more level playing field for EU citizens (with the accompanying paperwork!).
The future of Fintech/Bank collaboration
For a financial services firm, moving an HQ to Europe to assist compliance with regulations is an understandable, risk-minimising approach. There are however, ‘risks’ present in London which firms intentionally seek to maximise. London is the Fintech hub of the world and is likely to remain so. This is mainly due to the economics of any major operational movements; few other European capitals can accommodate the demand on talent of even a couple of UK headquartered banks. In the event of multiple departures, they are likely to be dispersed across the EU.
Despite the age of short haul flights and Skype, proximity to the greatest number of customers is a critical factor in the success of any business, but Fintechs especially. London will most likely retain this trait. In the event of departures, even a reduced talent pool will see some crucial expertise assist with the scaling up of many Fintech start-ups.
The Fintech-Bank collaboration phenomenon is at its most advanced in London, even if not yet at a stage where maturity has been fully realised. The centre of gravity that governs future success in this field may shift, but not substantially.
Ultimately, it is Brexit itself that may most affect Financial Services firms. The duration of uncertainty regarding the outcome is potentially the most damaging of all. The diversion of resources and internal capacity to mitigate against negative outcomes not only limits growth opportunities, but creates scenarios where no firm is likely to gain.
How can Financial Services firms prepare for the time ahead?
Ultimately, this depends on your size and current state of planning.
If you are not a large firm, it may be a little late to be thinking about the movement of sizeable operations. Even when considering the movement of a small number of operations, the access to talent and real estate elsewhere is likely to be costly. Major banks in the UK that are moving euro-centric operations are likely to have secured office space and have attracted much of the spare, skilled capacity that many other EU financial centres can offer. This will increase the cost of any large movements for smaller firms.
That’s not to say there are no contingency plans to be made.
Identifying critical operations that enable services to be sold in the EU is a first step, the second, knowing in advance which negotiating outcomes that affect these operations. For example, UK membership of EFTA following Brexit is an outcome for financial services substantially different to deferring to WTO rules. If late to Brexit contingency planning, choosing a destination country that larger firms are likely to shun, but with ample financial services operations experience is a sensible option, allowing for faster scaling up and less costly scaling down. Eastern Europe or the Iberian Peninsula for example offers a relatively large English-speaking talent pool with a well-established base of financial services skills. Look for a partner with experience in the area, preferably with passporting rights experience.
Whilst the months and years ahead are likely to offer more uncertainty for UK based financial services firms than many of the years following the 2007/8 financial crisis, geographically limited regulatory outcomes are easier to plan for. A framework can be created to allow for planning for the various scenarios and the response of your organisation to them, along with the exploration of contingency plans you are likely to enact.
So, whilst an answer to whether you should stay or go cannot yet be found, Financial Services firms can at least identify forthcoming political outcomes that trigger decision making and contingency plans being carried out that decide what should stay, and what should go.
*This section has been amended following the surprise election results on 09/06/17
Daniel Sawko, Consultant at Axis Corporate