The Impact of Brexit for businesses in the Financial Services sector
The current situation
The UK vote to leave the EU has no immediate effect on any laws relating to the operation of businesses with the financial services or any other industry. However, when Brexit does eventually happen, it will potentially have a profound effect on firms operating in the financial services sector, including banking and insurance, because so much of the legislative and regulatory environment they now operate in results from EU directives and regulations, and so many of the larger firms operating in this sector are pan-European businesses.
What may change
Rules relating to nearly every aspect of the operation of firms in this sector will be affected by Brexit because so many of them come directly from the EU – from capital requirements to product regulation, compensation schemes, competition, employment and data flows.
One of the main issues will be with “passporting”, which allows UK firms to operate in the EU without having to seek separate authorisation in each member state if they are authorised by an approved EU regulator (FCA/PRA), and vice versa with EU firms operating in the UK. Brexit will change this, although exactly how won’t be known until we understand how Brexit will operate and what the future relationship between the UK and the EU will look like. It’s worth noting though that consumer credit providers are however not entitled to “passport” anyway so would not be directly affected by this aspect of Brexit.
In terms of changes to other areas of law, again this will depend on what a post-Brexit UK and Europe look like, particularly whether the UK remains part of the EEA or not.
How this may affect business in the UK
Solely UK-based businesses in the financial services sector would not feel the effect of a withdrawal of passporting rights directly, but UK based firms with operations in the EU may well find doing business in Europe more difficult and costly if they need to register separately in each member state within which they provide services.
Issues with retaining and recruiting skilled staff from the EU may prove problematic in the short to medium term – and we have already seen a number of institutions announce their intentions to relocate to other financial centres. Longer term predictions are much harder to make. The situation may push the issue of training “home grown” talent more highly up the agenda for government and business, but we may also see more development of and a quicker adoption of automated technology/AI to replace humans, particularly in less-skilled jobs, which has already come into more widespread use in the industry. Where positions require more highly skilled workers, any potential visa requirements may not prove too much of a hurdle (thinking about the large number of Australian and New Zealand workers in the City).
Some industry players have been positive about Brexit because they view it as an opportunity to reduce some of the recently introduced “red tape”, having felt stifled by some of the more stringent rules on capital adequacy in particular. It is possible that Brexit may enable the UK to move away from these rules to become a more attractive regulatory environment, but a move to lighter regulation is by no means an inevitable result of Brexit. In the past, the UK has been at the forefront in setting the regulatory framework for financial services, and has even implemented stricter requirements than EU laws have required. Going forward it may be considered even more important for the UK to be able to maintain customer and investor confidence by demonstrating good governance and financial resilience. Also, if the UK wants to continue to have access to EU markets it may be that it is required to maintain similar, if not equivalent, rules.
The impact on UK banks, insurers and other industry players of the current and any future economic uncertainty arising from stock market fluctuations, exchange rate instability and the availability of finance, has to be one of the greatest concerns facing the industry and the wider economy. We are assured by the Treasury and the Bank of England that the UK economy is fundamentally sound, that lessons have been learned from the last recession and that they will take those steps to shore up banks and others in the sector to keep the country open for business. However, currently the position with the larger financial services providers is developing all the time, which will inevitably impact on the SME’s operating in this sector.
Although the new Prime Minister has indicated that she will be moving forward with Brexit without delay, given the enormity and complexity of the task of untangling the UK from the EU (government is currently seconding in all the help it can get from lawyers, financial and trade experts to try to figure out how it is going to work) it is likely that we won’t know the full effect of the referendum vote or the UK’s eventual exit on the financial services sector for some years to come.
If you have a query about any aspect of financial services please contact Paul Lester at paul.lester @crippspg.co.uk or call on 01892 506 336