Brexit clock is ticking loudly for financial services

However, migration dominated the agenda and while European leaders thrashed out the existential fate of the EU, Brexit headlines were relegated to second place (somewhat conveniently, some may argue). 

Attention has now shifted back to the wrangling within the prime minister’s cabinet. Despite the newly returned collective ministerial responsibility and an overarching negotiating path for trade in goods with the EU, we are still no clearer about the fate of one of the UK’s most important industries.

With nine months remaining until the UK leaves the EU, the investment management industry clearly has a vested interest in the process and it is vital that the legal and regulatory consequences of the negotiations do not hamper the ability of the investment profession to serve the best interests of investors, or indeed hamper companies’ ability to hire and retain talent.

Inextricably linked to all of this is ensuring that the brightest and best individuals do not remain an after-thought in terms of talent acquisition and retention.

In recent weeks, a clear difference of opinion has emerged between EU and UK financial regulators, with the European Banking Authority (EBA) stressing that the agreed transition period does not provide any legal certainty until the withdrawal agreement is ratified, and the Bank of England (BoE) criticising the EU27 for not doing enough to ensure financial stability in the case of a no-deal scenario.

However, the latter has reiterated that the UK will deliver on its promise to bring forward legislation for a temporary permissions regime to allow relevant firms to continue their activities in the UK after Brexit. 

The Treasury has set out the UK government’s approach to financial services legislation, announcing that they will be converting the existing EU acquis, or body of legislation, into UK law to ensure that a functioning legislative framework for financial services is in place even in the event of a hard Brexit. 

Stability

Finally, Phillip Hammond, UK chancellor, argued that the existing system of EU equivalence arrangements does not provide the stability that a well-regulated market requires, while Bank of England governor Mark Carney called for the future EU-UK financial services relationship to be based on equivalent outcomes and supervisory co-operation.

So, while negotiations between the EU and the UK continue until the next summit in October, financial services remains one of the most exposed aspects of Brexit and risks being relegated until the very end.

Inextricably linked to all of this is ensuring that the brightest and best individuals do not remain an after-thought in terms of talent acquisition and retention. This is a particularly acute consideration for the City.

UK government statistics show that the financial services sector represents 6.5 per cent of the UK’s economic output, and it employs one in every 30 people in the UK. The sector was the eighth largest in the OECD in 2016 by its proportion of national economic output.

In 2016 there were 1.1m financial services jobs in the UK, equating to 3.2 per cent of all jobs, and exports of UK financial services were worth £61bn, while imports were worth £11bn, so there was a surplus in financial services trade of £51bn.

Some 44 per cent of financial services exports went to the EU and 39 per cent of financial services imports came from the EU, and as the government announced back in March, the UK manages €1.5trn (£1.33trn) of assets on behalf of EU clients. 

Talking in these terms can make it all too easy to think about financial services as somewhat abstract and intangible.

The sector contributed £27.3bn in tax in the UK in 2016-17, so for the ordinary UK citizen, this would mean a sizeable hole in the public finances and should represent a significant factor in informing the UK’s negotiating stance. Brexit is expected to have a significant impact on UK asset management and two statistics stand out in the CFA Institute’s recent Global Brexit Barometer.

Firstly, the survey revealed that 67 per cent of UK respondents expect their firms to reduce their UK presence – Frankfurt is likely to be the biggest benefactor, with Paris, Dublin, Luxembourg and Amsterdam hot on its heels.

Secondly, 64 per cent of the Insititute’s UK members expect Brexit to negatively impact their company’s ability to attract the best talent. If this happened, it would not just dent the 6.5 per cent of economic output which the financial services sector is currently responsible for in the UK. It would also hurt investors, who expect their investments to be managed by the best possible investment managers and London is Europe’s richest pool.

The City is a talent magnet for ambitious professionals from all over Europe, contributing not just to the economy but also the vibrancy and cultural life of London and the UK. Substantial progress regarding the ‘settled status’ of EU citizens is therefore laudable and positive for our industry, and the end investor. 

Equivalence

We also need to consider the issues of equivalence and delegation as part of the broader discussion. Enhanced equivalence could provide for more stable access arrangements, based on deep regulatory and supervisory cooperation.

The CFA survey showed that members would still prefer full regulatory alignment and open market access, with no restrictions to the talent pool in order to minimise disruption. However, there is the small matter of persuading Brussels that regulatory alignment would not undermine the integrity of the EU single market.

On delegation, the Autorité des marchés financiers (AMF) in France publicly stated it is not intending to lobby for delegation rights against fund managers in the UK, and the BVI in Germany has called for efforts to ensure open access to UK investment services after Brexit.

This is a boon for the UK for now. With 37 per cent of Europe’s financial assets managed in London, if the current rules governing the management of funds from a jurisdiction other than the one in which it is domiciled were to change, this would be a significant cause for concern globally, thanks to the domino effect which could ensue. 

There are other hopeful signs. Individual member states understand that financial services cooperation needs to be a part of the future partnership with our European friends. The further away we move from the epicentre of emotion around Brexit, the more sanguine our members are that a deal on goods and services will be achieved.

However, companies and investment firms are not waiting for surety before making their contingency plans. In recent weeks, a handful of financial institutions confirmed not only that they’re setting up new offices and subsidiaries, but also beginning to move staff and confirming these numbers.

So while registrations for the CFA Program examinations in London are up by 30 per cent this year, suggesting  enthusiasm for London as a financial centre is not on the wane, much remains on the table to negotiate, and the Brexit clock is ticking more loudly than ever.

Gary Baker is managing director of EMEA, and industry and policy research at CFA Institute