A singular event in Europe, a spark, then a conflagration. Empires and economic systems are transformed and borders redrawn, with global impact.
The legacy of World War I? Well, yes. But the seismic changes above just as easily refer to Brexit years after the historic 2016 vote marking a thumbs up to a historic divorce.
The March deadline flashes before the financial world as the U.K. prepares to leave the European Union.
Much has been made in recent weeks over what may happen as talks reach the 11th (or is it 12th) hour between Britain and the EU — in this case, last-minute talks between Prime Minister Theresa May and EU President Jean-Claude Juncker — as there are still some issues left to resolve. Those issues span the gamut from how Gibraltar might be included in a trade agreement to what fishing rights may be going forward. There is also the issue of “frictionless trade” between the U.K. and the EU.
Oh, and, as reported by the Financial Times, there may be an extension of the timeline of the actual exit, to 2022. Or maybe not.
These and a host of other issues are on the table, and yet underpinning it all is a change in how the two entities will deal with each other in the most basic of ways — which is to say, how people and firms pay and get paid by one another. If commerce is the lifeblood of any economy, then payments are the lifeblood of the lifeblood.
London, of course, has for years been a nerve center for financial services in the region, which has been an integrated landscape of members spanning the European Economic Area (EEA) freely accessing each other’s markets. The overarching regulations have functioned at an EU-wide level, with various market authorities overseeing everything from basic banking services tied to lending and deposits to credit ratings and trade accounts.
That’s about to change, and from integration we’ll see patchwork efforts. The U.K. will navigate its transition away from the EU, while likely seeking to strike trade and financial services pacts with any number of countries that lie outside the European Union (and will do so, no longer under the guiding policies of EU regulations).
There were reports at the end of last month that a deal was near completion that would give the U.K. “basic access” to the bloc’s financial markets. CNBC reported that access would be akin to that enjoyed by U.S. and Japanese firms, while linking the U.K. to EU finance rules “for years to come.”
The outlines of a preliminary agreement seemed based at least in part on the idea of “equivalence” — it’s a system that is already in place and one that lets firms from non-EU countries with similar offerings as firms within the EU ply their respective trades within the union. This may take some time to be finalized, as there are two stages to Brexit itself as the separation takes shape. First there is the actual parting of ways between the U.K. and the EU. Then there also will be a declaration of what how trade between the EU and the U.K. will change or stay the same, including financial services.
Covering Their Flanks
Banks, of course, have been covering their respective flanks, with any number of marquee names, such as UBS, Deutsche Bank and Credit Suisse moving staff away from London. No small impact, then, when as much as 37 percent of the continent’s financial assets are managed in London.
Equivalence, however, may leave a lot on the table still to be hammered out. Reuters noted last week that only a limited range of activities is covered by the framework, and one law firm, Hogan Lovells, states that equivalence rules actually touch only a quarter of cross-border financial activity conducted in the U.K. Critics charge that equivalency can be revoked by regulators in Brussels, and that the U.K. should have a longer period than the 30 days’ notice currently in place.
The basic access model has been a cause for some disappointment, Reuters reported last week, with stocks sinking, but political upheaval held sway as several ministers resigned and the tumult threatened the very ability of Prime Minister May to get Parliament to agree to the plan.
Against the backdrop of uncertainty, some firms have created contingency plans. RBS, for example, eyeing financial disruption, has set up a $2.6 billion fund that will help small and mid-sized firms navigate possible supply chain disruptions, helping smooth trade finance issues, should they arise.
Deal … Or No Deal
The specter of a “no deal” Brexit still is there. And in a taste of what that might mean across the payments landscape for tech upstarts, Forbes noted in August that customs checks will add to the cost of doing trade, and cross-border payments — as in when U.K. citizens visit the European Union and wield credit cards to pay — will also see a boost in surcharges. That might hit credit card usage, already perhaps a bit stifled, given the fact that as many as 67 percent of those under the age of 30 in the U.K. do not have cards.
There also will be an impact on U.K. FinTechs. Per Forbes, in an interview with Carlos Figueredo, CEO and founder of Open Vector, a “no deal” scenario would hit FinTechs mainly through the possible loss of passporting rights. Those rights let FinTechs do business across EEA countries without having to register on a country-by-country basis. It may be tough for smaller firms to come to market with new regulatory hurdles in place, or move operations. Markets — whether steeped in financial services, payments or physical supply chains — do not like uncertainty.
With Brexit, it seems the only thing certain is … uncertainty itself.