Thought Piece

Brexit | One year on

Posted: 29 Mar 2022

Resource Type: Thought Piece

Brexit has had a significant impact on the financial services sector and on our clients. A lot of Euro denominated activity has moved "onshore". But, the UK remains a major international financial services centre and the City is working hard to retain its competitiveness.

I am often asked how the City is faring one year on after we left the single market. The simple answer is "very well, thank you" but that British understatement covers a range of different impacts, made even more complicated by Covid.

"No deal" for financial services 

The immediate impact of Brexit was of course difficult. Many firms - insurers, banks, fund managers - had made extensive use of the single market and based a significant proportion of their EU client facing activity in the UK, including activity in EU currencies like the Euro. In addition, UK based market infrastructure traded and cleared many EU securities and many EU firms had direct access to the international securities and reinsurance markets in London. But there were no arrangements for continued cross border provision of services in the new EU-UK trade deal, the TCA, and once this became clear, firms committed massive effort and resources into splitting their businesses into UK and EU regulated entities. As some have commented, this was a deliberate and costly act of fragmentation. 

EY's recent survey of investor confidence in financial services had a remarkable 87% of firms expecting to expand in the UK and a record high of 90% of investors believing the UK will be equally or more attractive a destination in three years.  

Market adjustment and a smooth transition

In the event, the Brexit "divorce" process worked and worked well in financial services. There was no market disruption at the end of 2020 and certainly in wholesale markets the so-called repapering of clients to domestically licenced firms went well. Many clients saw no disruption to services. Markets handled the compulsory onshoring of trading in EU securities efficiently, with much of the trading in EU stocks and bonds previously executed on UK based trading platforms moving to their sister platforms in Amsterdam and other EU centres. The only real point of continuity was the continuation of clearing by EU firms in the UK clearing houses, permitted by the application of a so-called EU equivalence provision. This reflects the dominance of clearing in London and allows EU banks and their clients access to the liquidity there.

In terms of job moves, it is estimated that some 7-8,000 jobs have moved from UK firms to a variety of EU centres, but thousands more have been hired locally as firms built up their EU offices. And some EU firms have similarly built up a presence in the UK. Over £1 trillion of assets are estimated to have moved from UK to EU balance sheets. We think that EU domestic activity represented roughly an eighth of wholesale markets activity by firms in the UK. That activity has largely moved.

The UK’s ongoing competitive strengths

But London remains a very significant international financial services centre globally and is still the dominant centre in Europe. Much EU non-domestic activity is still intermediated through London. For example, foreign exchange trading, commodity trading, investment in overseas markets and trading in non-EU securities remains substantially in the UK. We think this activity by EU firms accounted for another eighth of wholesale market activity and market contacts across Europe confirm that they expect London to remain a major international centre. Meanwhile EU domestic activity seems to be pooling in a number of regional centres across the EU in what has been called a multipolar EU capital market.

The latest Z/Yen Global Financial Centres Index has again ranked London 2nd. 

London: benchmarked against other financial centres

Recent data bear this out. Our own benchmarking survey for example looks at a wide range of qualitative and quantitative factors across five broad areas (innovation, breadth and depth of markets, resilience and cyber, talent and quality of life, and legal and regulatory framework). It ranks London generally in the top three globally in each category and first overall, ahead of New York. The latest edition of the well-known Z/Yen Global Financial Centres Index has again ranked London second. New York was ranked first, while leading EU centres such as Paris (11th), Frankfurt (16th), and Amsterdam (19th) were all slightly down on last year. And EY's recent survey of investor confidence in financial services had a remarkable 87% of firms expecting to expand in the UK and a record high of 90% of investors believing the UK will be equally or more attractive a destination in three years. Finally, I spotted that Citi has revealed that despite increasing head count in the EU and moving jobs there from London, they have actually increased head count in both London and Belfast by a thousand staff in each.

Looking ahead

But the City is not complacent. Losing access to the single market is a major challenge. Accessing global markets without the benefits of the integrated regime in the EU behind us is harder. But global markets, especially in Asia, is where the growth is. Europe's share of global capital markets is shrinking. We have therefore recently established a competitiveness board in the City of London to focus our efforts. We also welcome the renewed emphasis from the UK Treasury on competitiveness and on recalibrating the UK's regulatory framework. 

Two particular challenges stand out. One is how to reshape the financial sector to deal with climate change and finance decarbonisation. The other is how to adapt to the digital age. Both are common to the EU and the UK and are ripe for both cooperation and healthy competition. I will return to these themes in a future blog.

 

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.

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