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UK Banks’ Brexit Game Plan: Denied, With No Plan B

The financial services community is one of the most anxious when it comes to navigating the uncertainties of Brexit. U.K. financial institutions are scrambling to protect their interests as analysts warn of lost jobs, bank relocations and depressed revenues.

News surfaced Wednesday (Jan. 31) of another wrench in U.K. banks’ Brexit fight: The European Commission (EC) has reportedly rejected a financial services trade deal with the City of London, a move in which, Reuters said, London is likely to see less favorable trade terms when dealing with the EU.

According to the publication, the EC’s rejection could also accelerate the financial services industry’s future plans to relocate operations from the U.K. into mainland Europe.

Two unnamed sources told reporters that the European Commission denied U.K. financiers’ efforts that would allow finance companies from both markets to operate in each others’ jurisdictions even though the U.K. plans to leave the EU’s Single Market. The deal would have enabled cross-border trade in the financial services market as long as each side complies with regulatory standards in line with international best practices.

The City of London reportedly wanted close ties between U.K. and EU regulators and industry policymakers to ensure industry trade flowed smoothly.

Reports said EU policymakers, however, weren’t interested in those plans.

“They have made it very clear to us that this is unacceptable to them,” one unnamed U.K. financial executive told Reuters. “This was our best and frankly only proposal. We don’t have a plan B.”

 

High Stakes, High Tensions

According to Reuters reports, the EU is dismissive of any deal that would provide the U.K. with the same access to the EU market despite the U.K.’s decision to leave that single market. The publication said Brexit negotiations in the financial services space are some of the most “divisive,” with both sides standing firm.

The stakes are high, as, according to Reuters, the U.K.’s financial services market is the world’s largest in terms of number of banks. The London market alone holds more than a third of Europe’s financial assets, and the city is Europe’s largest investment banking space.

“But unless it can secure a trade deal,” the publication stated, “for all its geographic proximity, Europe’s largest financial capital will end up adrift with the same access to the EU as other countries like Singapore.”

That would be a huge blow to the U.K. FinServ space. Recent research published by Morgan McKinley Financial Services found a 37 percent decline in new financial jobs in London last month, attributing that decline to Brexit. The number of professionals seeking employment in the industry also declined in December year over year by 30 percent.

Brexit could lead to 10,000 finance jobs being shifted out of the U.K. or being created outside the market in the next few years if the nation is unable to secure relatively unobstructed access to the EU single market, the report warned.

“Brexit clobbered the city [of London]’s workforce in 2017,” said Hakan Enver, Morgan McKinley operations director, in an interview with Reuters at the time. “Anyone sticking it out into 2018 is in it for the long haul.”

Previous estimates from Goldman Sachs predicted a hit of nearly $40 billion on banks’ bottom lines due to Brexit through 2018, representing about 11 percent of profits.

“We forecast a weaker outlook owing to lower volumes, margins and fees,” said the Goldman analyst team in 2016.

 

The Latest Blow

Reports that the European Commission rejected what was the City’s only apparent proposal is just the latest blow to the U.K.’s Brexit negotiation efforts.

Earlier this month, The Financial Times reported that, despite assurances from the Department for Exiting the European Union (DExEU) the City of London would receive a report on detailed trade goals for Brexit negotiations, unnamed government officials said the report may never actually come to light, warning that the U.K. government has yet to reach a consensus on talks with the EC.

“For the government, a whole year after triggering Article 50, not to have published an outline of where they expect to be in negotiating on behalf of such an important part of the economy is a problem,” said Tory member of Parliament and Chair of the Commons Treasury Committee Nicky Morgan in an interview with the publication.

Struggles to negotiate a fair and favorable trade deal with the EU Single Market have implications far beyond the financial services space. Separate research from the universities of Essex and St. Andrews found small- and medium-sized businesses (SMBs), for instance, are likely to be among the most impacted from Brexit uncertainty and trade disruption.

But the world’s top financial market remains increasingly anxious about the outcome of the U.K.’s exit from the European Union in March of 2019. Last November, City of London Financial District Policy Chief Catherine McGuinness reportedly called for the U.K. to reexamine bank regulations post-Brexit, predicting industry oversight to experience a major shift.

“The global financial services industry is more competitive than ever before,” McGuinness said, according to Reuters. “Losing the slightest edge can be significant. That is why it is vital that we get Brexit right.”

As it currently stands, the U.K.’s financial services market does not yet have a way to retain that edge.

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