As the fall out from the Brexit vote comes home to roost, a long and challenging period of uncertainty is facing UK businesses. But none more so than the UK financial services sector which employs so many people. While there is no suggestion that when the UK leaves the EU that banking regulations will be changed, this high degree of uncertainty about the future of banks is going to cause worry to many employees and clients.
There is an increased risk to borrowing costs if interest rates rise impacting many families who might be unable to service their mortgages and personal debts. There will also be uncertainty in the property market which has already been hit by the falling value of the pound. A drop in property values will put many families in a position of negative equity.
Also, the appetite from overseas clients to invest in the UK may soon wane once the reality of Brexit starts to impact. So far, effects have been restricted to the domestic market, but it is sure to change International markets in the future.
Worth some £1.1 trillion, the UK lending offered to businesses from large banks is what helps to keep Europe going. The free trade in financial services (passporting) that is currently in operation is a boost to both European and UK businesses and this huge amount of business (around £20 billion) is also going to be at risk.
The gloomy predictions of the British Bankers Association have been published in all the media. Some news outlets have dismissed them as fear mongering, while others take them more seriously. The BBA has suggested that some smaller banks are seriously thinking about relocating to Europe before the end of the year. They also suggested that in early 2017, larger businesses will already have their finger hovering over the relocate button.
In spite of soothing noises coming from the government, there has been little for the UK financial services and in particular the banks to grab onto. Many are now seriously considering upping sticks and going to other European cities like Frankfurt or Paris. For these lucrative businesses, it would mean the continuation of passporting rights. To the American giants like JP Morgan, these rights are the big business that they do not want to lose and some US banks may be the first fire the starting gun and leave.
Similarly, many European businesses find it much easier to operate as they have a wide choice of banks from which to secure loans and investments. The exclusion of the UK from the EU is going to put at risk the jobs of some 1 million people, many of whom live outside of London. A knock on effect to businesses is also going to create more uncertainty which could also add to substantial job losses.
The banking sector is the business area that is going to be most affected by Brexit. It is the UK’s largest service export and the banking rules and regulations throughout Europe are all the same. There is some question about whether, after Brexit, the UK banks will continue to have the legal right to provide services unless some transitional agreements are put in place.
European leaders are now in the process of hardening their stance against the UK with Donald Tusk stating the old adage that the country cannot have its cake and eat it. Similarly, Francoise Holland wants the UK to ‘pay the price’ for leaving the safety of the European Union.
Hard line Brexiteers have stated that there is no connection between the four freedoms and passporting services and that the UK can access ‘third country equivalence.’ This option only covers a small range of services. The UK would have to abide by strict rules and not have any say in making them. Furthermore, there are other European cities which would love to have some of the lucrative financial business that currently resides in London. Therefore, their leaders will not be inclined to make it easy for the UK to continue to dominate the UK financial services sector.
If there is a disruption to the integrated UK financial services that are currently operating in the EU, it will cause problems for companies throughout all of Europe. Raising short term loans would be more difficult, causing a slowdown in the European economy on a much wider scale.
The real challenge for the financial sector will be the day after Brexit is concluded unless there has been an agreement put into place to protect or replace passporting rights. Deals, which the day before were legal, will be illegal and standard regulations will not apply to all the concerned parties.
Now that the vote to leave the EU has become a reality, the big banks have set up focus groups which will plan how to move operations if they decide that this drastic measure is needed. The large banks will be looking at the first quarter of 2017. While the top players who make money will be offered relocation packages to go to Europe, the back office staff could be left with the prospect of unemployment in a sector that will be rapidly shrinking.
There has been some discussion about the government providing more information to banks before the big players move to Europe or even choose New York or Singapore as a base. Banks are preparing for the worst case scenario, that is, the UK leaving the EU with no deal in place. Almost a fifth of the banking sector jobs are tied to passporting so the removal of this vital tool would be a big blow to the UK economy and would increase unemployment figures.
One country that could benefit from the UK’s loss is Ireland which is considered aprime relocation destination. The main language is English, and it is not too far from British shores. Of course, nothing is yet certain. The employees and customers of banks will just have to sit it out and wait and see which direction UK financial services will take in the future of Brexit.