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Brexit: Deal or No Deal - What does it mean for Financial Services sector

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Updated 13/12/2018: Theresa May survives a vote of no confidence and cannot be challenged for another 12 months. However, the same challenges still remain as she pushes to get her deal across the line.

With the recent news of a postponed Brexit deal vote and an upcoming vote of no confidence in Theresa May, businesses and citizens across the UK and Europe are worried as the deal hangs precariously on a cliff edge.

With regards to the British government, if Theresa May survives and the deal does indeed go to a vote, here are the different options of the deal passing or being rejected. This workflow from BBC explains the possible outcomes:

As a result of the confusion and chaos in the Commons, the Financial Services sector is in a state of flux. With so much money at stake, the question must be asked - how will Brexit affect the Financial Services sector?

According to Forbes, within the EU, the UK hosts the largest financial services sector – accounting for 24% of the gross value added produced by that sector in the EU in 2015. Germany came in a distant second with 15.9%, followed by France, Italy and the Netherlands.

Within the UK, the sector currently contributes £119 billion to the UK economy, employs over 1.1 Million UK residents, and paid over £75 billion in taxes last year. 

So, What Are The Options?

Well, it depends on a ‘Deal’, ‘No deal or perhaps “some other deal/new referendum?”. If a deal or no deal is reached, we can categorise what type of businesses will be affected and at what scale. There a quite a few scenarios that could play out, however, we have broken down the affected business into 3 groups.

  • Group A - UK-based FS firms with clients in the UK & EU 
  • Group B - EU-based FS firms - with clients also in the UK. 
  • Group C - UK-based FS firms with no clients in the EU

Group A

These UK firms, with clients across the EU, will be affected the most. In a worst-case no-deal scenario, UK firms will not be able to easily enter into the EU market. This will more than likely lead to increases in administrative expenses, logistical costs and foreign exchange rates (which will increase product pricing and competition).

For companies with only a small supply of clients outside the UK, it might not be beneficial to continue in the EU market. Of course, for UK firms with the majority or large supply of clients in the EU, there is probably no other viable option than to grin and bear the pain over the short term.

UK companies selling across to the EU market may face high import duties, territory-specific obligations, and explicit measurement and certification demands. This is not good for the financial industry of the UK.

The Financial Services industry also currently relies on Passporting, which states that a licence held in any EU or EEA state can trade freely within the EU. A recent report published data showing that almost 5,500 UK firms rely on these corporate “passports” to conduct business across the EU.

On the other end, over 8,000 European firms are using “passports” to provide services in the UK. As it stands, these ‘Passports’ will be completely lost if there is ‘no deal’.

Firms that fall into this group will need to decide whether it is beneficial for them to continue operating across the EU.

Group B

Group B will be somewhere in the middle in terms of being affected. This group of businesses, along with group A, will be quite reliant on the outcome of a Brexit deal.

As mentioned above, if there’s a no-deal outcome, firms will lose their passports to operate in the UK. New trade and regulations deals will have to be negotiated, which will also take some time.

While the UK is a large market for a lot of firms, it's not for others. Brexit could possible see EU firms withdraw from the UK market. However, this is unlikely to happen straight away but potentially over the next 5-10 years depending on the impact.

Group C

UK firms that fall into Group C will likely be the least affected. Their main challenges could be if any, increases in logistical costs, difficulties accessing capital and fluctuating foreign exchange rates.

Firms that fall into this category are facing nothing too critical in terms of Brexit and will most likely be ‘business as usual.

What Outcome will Businesses see in the UK?

Brexit (especially a no-deal Brexit) will have a domino effect on businesses. This leads back to the financial sector, which could see the largest complications or issues. With the possibility of a rise in inflation, Sterling losing strength and difficulties accessing capital, Financial Services businesses could certainly feel the pinch.

Another sector that will be largely affected will be the manufacturing industry. In the UK, there are currently over 186,000 people employed in the manufacturing of motor vehicles alone. With over 50% of motor exports going to the EU, there could be severe repercussions if a no-deal moves forward. With a no-deal Brexit, there is a high probability we will see many large manufacturers relocate within the next 5-10 years.

This, in turn, will affect the financial sector. Banks may see lower investments, especially if over 1.1 million of the UK residents working in manufacturing become unemployed and businesses take their money elsewhere. Insurance companies, for example, could face reductions in policies and losses in corporate pensions, etc. as a knock-on effect.

The opportunity for Financial Services exports post-Brexit

However, it’s not all doom and gloom. Currently, due to EU regulations, the UK cannot negotiate bilateral trade agreements with other countries. In the scenario of exiting with a no-deal, the UK would be in a position to negotiate trade deals with countries of their choosing, such as the US and China.  

A report by Capital Economics, for Woodford Investment Management, suggests in the Financial Services sector there will be short-term pain for long-term gain. They state “The City’s competitive advantage is founded on more than just unfettered access to the single market. A European Union exit would enable the United Kingdom to broker trade deals with emerging markets that could pay dividends for the financial services sector in the long run”.

UK’s loss could be Ireland’s gain?

With so much uncertainty surrounding Brexit, international companies will no doubt hesitate to make investments in operations within the UK. With favourable tax incentives, access to the single market, centres of excellence in financial services and a thorough understanding of the UK market, Ireland is well placed to take advantage.

Europe has provided an Escape Route for the UK

The European Union’s top court has provided the UK with a ‘‘get out of jail’  free card. The UK, if they want, can revoke Article 50 before the 29th of March, allowing for another referendum to take place. With the EU not for turning on any further negotiations, and Theresa May’s Deal looking increasingly like failing, it seems like there are only 2 options left on the table - No Deal or Revoke Article 50.

In the meantime, what can you do?

Prepare your business.

The next few months are uncertain, there could be a general election, a new referendum or a deal or no-deal.

While it is impossible to know the outcome now, one thing you do need to do now is to start making a contingency plan. Plan for different scenarios. Know what you will do if the deal is voted in, know what you will do if a no-deal is confirmed.  

On the 29th of March, the UK is set to leave the European Union. You will need to have a plan for when Brexit happens, so you can not only be prepared but be able to reassure your customers as well.

Want to learn more about Brexit.

Resources we suggest reading:

Is the Financial Services Sector interested in Salesforce implementation? Take a look at our Financial implementation options today or contact us to find out more.

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