What impact could Brexit have on the UK’s financial services?
With financial services contributing over 7% to the UK’s GDP, and employing more than 1 million people, it’s no surprise that the impact a potential Brexit would have on this vital sector has become such a contentious topic. It’s easy to become exasperated with such debates. So often they whittle down to indignant accusations of scaremongering and hyperbole from the ‘leave’ side when the ‘remain’ side spell out the potential negative implications. While on the other hand, the ‘leave’ side accuse the ‘remain’ side of wishful naivety. Setting out a ‘idealistic’ vision of ‘independence’ on the wing of a prayer. It’s of little surprise that so many voters are crying out for just some simple facts on the matter. Or at the very least, opinions that are based on some concrete analysis, unswayed by political posturing or ulterior motives.
Of course, when it comes to such discussions, there can never be a definitive answer, hence why it’s so easy for politicians to apply their own theoretical spins to the potential outcomes of a Brexit. Predicting how the markets may respond should the UK leave, is to a large extent a hypothetical task. There is simply no telling what affect Britain’s departure from the common market would have on foreign investment, or what impact it would have on the pool of talent it is able to attract to fuel our financial sector. Simply put, these key issues would be determined, overwhelmingly, by what arrangements (or deals) the UK would be able to negotiate should it set sail, and despite what some on either side would contest, that is anyone’s guess.
There are some facts however, which enter this political foray that are irrefutable. Perhaps the most significant when assessing what impact Brexit would have on our financial services, is the fact that many major firms from across the world come to London specifically to access the European single market. We know this, because they have stated this… unequivocally. The jobs and investment they bring with them to the UK, are entirely dependent on being able to establish a presence within Europe. This is not to say that Brexit would instantly bring an immediate end to all the perks the UK enjoys through its membership to the EU. The role of ‘self-interest’ would ensure that at the very least, some would stay. The reality is though, other benefits would not, instantly rendering other locations within the EU more attractive for major firms to locate to. After all, why enjoy some of the benefits in one location, when you can enjoy all of the benefits in another? The obvious alternative frequently touted is Paris, it has the strong credentials of being a global city with a vast wealth of talent and skillets, in addition to being a financial powerhouse in its own right. A Brexit, would be playing with fire if those who advocate it, underestimate the magnetic draw of a city like Paris or Berlin for that matter.
The lack of clarity on the UK’s future within the EU has already brought hiring in the city to a dramatic halt. Investment banks in particular feel the effects of this uncertainty, as they stand to lose access to a market comprising more than 500 million people, across 28 other member states. No matter what claim, proponents of Brexit make about a ‘business as usual’ status resuming in the event of a break up, there is no escaping the fact, that the UK’s status as a financial services powerhouse depends heavily on its ability to recruit from the EU. According to the latest census, of the 360,000 City’s workers, around 11% are recruited directly from elsewhere in the EU.
It is important to state that the impact would vary from sector to sector. Clearly firms engaged in wholesale banking, capital markets and investment management, which trade across European borders would suffer the greatest impact. Britain has long been seen as a great port of access to the single market, particularly from major firms based in the US and Switzerland (which don't have access). Should this end, there’s no telling if such firms would see the UK as quite the convenient port they had previously. Much would depend on what deals could be carved out in the aftermath. What is clear though, is that whatever arrangements are put in place in the event of a Brexit, it’s very hard to envisage the EU allowing the UK to maintain a competitive advantage, given the economic boost such a sector could offer their respective economies.