Disruptions To UK Financial Services Post-Brexit
Despite reaching a Brexit trade deal, there remains great risks and uncertainties within many UK industries after the Brexit transition period. Pre-Brexit, the Bank of England (BoE) had warned that there would be significant disruption to UK financial services and it seems that the concerns have now become a reality in 2021.
The UK attempted to make progress to avoid disruption to the financial services during Brexit, but, according to the BoE’s Financial Stability Report for June 2018, much more needed to be done.
The BoE’s most recent Financial Stability Report conducted in December 2020, reaffirmed their position on the outlook for UK financial services post-Brexit, stating that there would continue to be disruptions to cross-border services after the end of the transition period, although most risks had been mitigated.
UK financial services plays a significant role when it comes to business with the EU, with 40% of the financial services sector’s exports going to the EU. It was, therefore, surprising that the future of the sector was largely left out of last years’ Brexit trade negotiations.
Of the 1,200 pages of the Brexit Trade and Co-operation agreement, just over four concerned the future of UK financial services. UK Prime Minister, Boris Johnson, himself acknowledged that aspects of the Brexit trade deal fell short of UK expectations, particularly within the services sector. As a result, the financial services sector is experiencing severe disruptions to its EU operations.
How has UK financial services been impacted post-Brexit?
Prior to the Brexit transition period, the UK could sell its financial services to the EU without the need for any supplementary regulatory clearance.
From 2021, UK based financial services firms can only gain access to EU business through complying with regulatory requirements of that individual member state or through equivalence. The latter route is only achievable if the EU recognises that UK regulations are in keeping with that of the bloc.
Pre-Brexit freedom of movement created a much more straightforward process for UK financial firms and, undoubtedly, seeking approval on a state by state basis going forward is much more complex.
Furthermore, equivalence does not include the same range of services covered by previous passporting rules. The following services are not covered by equivalence:
- Deposit taking
What is the future for UK financial services post-Brexit?
The Brexit Trade and Co-operation agreement stated that the UK and EU would look to reach a Memorandum of Understanding concerning UK financial services by March 2021. The Memorandum of Understanding will attempt to clarify issues surrounding equivalence as well as the future of market stability. Despite the upcoming measure, many are concerned that more needs to be done in the meantime to reassure the markets.
UK Chancellor of the Exchequer, Rishi Sunak, believes that in the long-term, Brexit will provide a boost to UK financial services as a result of the UK’s new-found regulatory autonomy.
Mr Sunak commented that Brexit will “reinforce the UK’s position as a globally pre-eminent financial centre. What is probably more important is the culture and creativity of our people. And no document can take that away from us. I feel very confident, and very excited, about the future of the City of London and financial services in general.”
The December 2020 Financial Stability Report by the BoE highlights the following points in relation to the future of the UK’s financial stability:
Robust prudential standards
Irrespective of the particular form of the UK’s future relationship with the EU, and consistent with its statutory responsibility, the Financial Policy Committee (FPC) will remain committed to the implementation of robust prudential standards in the UK.
“This will require maintaining a level of resilience that is at least as great as that currently planned, which itself exceeds that required by international baseline standards.”
The role of The Financial Policy Committee
The Financial Policy Committee aims to ensure the UK financial system is resilient, prepared for a wide range of risks and can serve UK households and businesses in bad times as well as good.
Bank system can support disorderly Brexit
The FPC ensures the UK banking system remains resilient to a wide range of possible economic outcomes. It has the capacity to continue to support businesses and households even if economic outcomes are considerably worse than currently expected. This reflects the build-up of substantial buffers of capital since the global financial crisis.