As recent political events have shown, navigating Brexit will by far be the biggest challenge in 2019.
Indeed, with so much uncertainty surrounding if, how and when the UK will leave the EU, the country is finding itself in unchartered waters – and no industry is potentially more affected than financial services.
London has long been the epicentre for financial services in Europe, so the big question is how Brexit negotiations will change this.
We have already started to see companies move their operations from the UK to other countries within the Eurozone as concerns around the nature of the Brexit settlement increase.
If the UK loses its European passport it could mean more market participants will move entities and capabilities to a location within the EEA to trade freely across borders.It is understandable that financial companies are concerned. Over the past few months we have witnessed just how complex leaving the EU is.
However, with fear mongering at its height, will Brexit be as much of a negative impact for financial services as is being depicted? One of the biggest worries has been that companies are increasingly pausing or diverting investment in the UK.
While this may be the case for some investors, this is not necessarily as widespread as people think.
A recent poll conducted by Interactive Investor revealed that 38 per cent of investors are choosing to do nothing until a decision has been made on Brexit, while only 13 per cent of investors are currently choosing less risky investments.
The ‘wait and see’ approach is unsurprising given the level of ambiguity around UK’s negotiations with the EU, and while it can cause apprehension, it should be seen as a positive indicator that investors are not panicking and immediately withdrawing all investments.
The regulatory impact
From a regulatory standpoint, the majority of financial and banking rules today are derived from the EU, while all members of the European Economic Area are able to access each other’s markets using their ‘passporting rights’ without being required to ask European regulators.
If the UK loses its European passport it could mean more market participants will move entities and capabilities to a location within the EEA to trade freely across borders.
It is worth noting, however, that if these moves continue, global companies such as JPMorgan, Citigroup and Morgan Stanley will still be a big presence in the UK.
The good news is that technology nowadays enables companies to maintain and expand their global footprint without having a physical presence. Take cloud technology, for example. Capital market participants can now rely on this technology to work, trade and communicate remotely.
Will we subsequently see capital market participants start using ‘machines’, rather than people?
Will they ramp up their adoption of cloud technologies to compensate for not having a base in certain locations?
By leveraging new technology and taking an approach to enhance their capabilities in key trading centres throughout Europe, participants could find a way to adapt quickly and adopt whatever passport-driven approach they need.
The UK and EU are undeniably linked. The 27 other member states may have strong industries and markets – some that outsize or out-perform the UK – but the UK has played a dominant role in Europe’s financial services industry for more than 40 years.
As the politicians try to manage their way to March 29, the financial industry will be waiting with bated breath to see how big an impact the UK’s departure will have. There is no denying the repercussions will be felt, both good and bad, as the relationship between.
However, the UK is an unrivalled financial leader and I am confident that its size and importance will ensure it stays this way.
Ganesh Iyer is director of global marketing at IPC
