Four and a half years after the UK voted to leave the EU, London and Brussels finally agreed on a new trade and securities agreement that will shape their relationship for decades – a deal we all anticipated in the lead up to the end of 2020. However, it is apparent that the UK’s financial services industry has been left behind, leaving strong doubts on the long-term impact of Brexit on the economy.
The UK finance sector includes areas such as accounting, banking and finance, financial planning, insurance, investment and pensions and tax, which are often regarded as a subset of accounting. The financial industry is significantly influential on the British economy. It contributes 12% to the UK’s total GDP and generates more than two million jobs. According to CityUK, financial and professional services account for more than 7 percent of employment in the UK and £10 in every £100 of UK economic output.
Its relationship with the EU is also profound. British banks lend almost $1.1 trillion to EU companies and governments and most of the EU’s financial activities are directly or indirectly performed in London, with 87% of US investment banks European staff being employed in London.
We would assume the finance industry’s importance on the UK economy would mean it would fall into the government’s top priority list when it came to agreeing on a Brexit deal at the end of last year. However, Boris Johnson has admitted that the Brexit trade deal failed to meet his ambitions on financial services and Brussels has made it clear that the UK must be patient when demanding to know what relationship the finance sector will hold with the EU in the future.
Uncertainty arises around two particular issues – the nature of the equivalence rules and loss of passporting, the ability to trade freely.
The EU and the UK will agree to an understanding of these equivalence rules by March 2021, which are particularly important to the financial services as they enable UK-based businesses to sell services into Europe. In 2019, UK exports to the EU were £294billion, which amounted to 43% of all exports – a huge figure that emphasises the importance of these equivalence rules. At the moment, these rules are governed by bilateral agreements. Many UK-based banks have moved personnel covering the Dutch, French, Spanish and German markets to Europe, while those covering Italian and Scandinavian markets have been able to remain in the UK; Italy announced it is allowing UK companies to keep operating as long as they are in the country for another six months.
UK banks and financial services will also lose their passporting rights, which enables them to trade freely within the EU single market with minimal authorisation. Without passporting, UK-based banks in the rest of the EU revert to the status of ‘foreign’ bank branches, with potentially restrictive implications for how they are regulated. Relying on the domestic order of individual EU countries as opposed to the EU wide passport scheme is more limited, costly and complex and will result in a patchwork of outcomes. In the absence of equivalence and the anticipated end to passporting, companies have since acted on their own initiative. London-based fintech Revolut moved Irish customer bank accounts to Lithuania last year with the consideration that, at the end of the transition period, the UK regulator would not be able to regulate accounts of EU citizens.
However, amongst doubt, there is hope that the EU and the UK both recognise the implications that both sides could face if an agreement is not settled. For example, the Temporary Permissions Regime, a financial entity authorised to operate in the UK through passporting, has been allowed to continue operating for three years from this month, which within that time they will be expected to obtain UK licenses. It is likely we will see similar cooperation made between the EU and the UK throughout the coming months.