UK financial services face an uncertain future post-Brexit, as a think tank warns that the country’s dominant services sector has been overlooked in the trade negotiations with the EU.
UK financial services face an uncertain future post-Brexit, and leading voices are warning that the country’s dominant services sector has been overlooked in the trade negotiations with the EU.
Think-tank The UK in a Changing Europe has issued a report, ‘Services and Brexit’, calling out the lack of attention paid by the governments of both Theresa May and Boris Johnson to the services sector in Brexit negotiations, despite the fact that it accounts for around 30 million jobs.
“It is worrying that the biggest sector in the UK economy – accounting for more than 80 per cent of it – has been the subject of so little focus in the UK-EU negotiations,” says Professor Anand Menon, director of the UK in a Changing Europe.
“This serves to underline the largely political nature of the government’s Brexit priorities, focused on regulatory autonomy rather than any economic implications of this.”
The financial services sector was left looking for answers after the UK government’s draft text of a trade agreement with the EU was published in May.
The draft agreement called for greater transparency from Brussels over UK financial services firms’ access to the single market – which remains in the shadows as the EU has not yet made a decision on whether UK regulations are strict enough to be deemed ‘equivalent’ to the EU.
This system of “equivalence”, whereby financial services will be able to access the single market if the EU’s considers the UK regulations stringent enough, is set to take over once the UK leaves the EU. Previously, firms enjoyed free access to the single market by a system of “passporting”.
This means that UK may have to choose between maintaining its access to the single market, or enjoying more regulatory freedom to develop other global markets.
UK in a Changing Europe noted that the new system has drawbacks since equivalence, if granted, allows less comprehensive market access than passporting, with core banking services such as lending not able to secure single-market access this way.
It is also less stable for financial services firms, since the EU will be able to revoke its decision to grant equivalence with only 30 days’ notice.
Professor Sarah Hall, the report’s main author, said in a press briefing that the country’s GBP10 trillion asset management industry was “one of the areas within financial services where not being a ‘rule taker’, and being able to take advantage of more regulatory autonomy, is seen as an advantage.”
Autonomy is seen as an advantage since it would allow UK services to develop other global markets, particularly the US, which is the most important single country for services exports from the UK.
Meanwhile, a number of asset managers including Baring Asset Management, Standard Life Aberdeen, and Morgan Stanley Investment Management have made plans to relocate to other European hubs inside the EU, such as Dublin, and to a lesser extent, Luxembourg.
The EU has not yet made a decision on whether the UK will be deemed equivalent, and is unlikely to do so soon, as the EU Commissioner responsible for financial services, Valdis Dombrovskis, recently said it was unlikely that decisions would be reached by 30 June.
