Brexit and UK-Based Financial Services

London is by far Europe's largest financial centre, leading other European centres in a range of services, as shown in Table 1.

Table 1: Financial Markets Share by Country (%)

Figures underlined indicate market leader.

According to TheCityUK, to give one example, London's strength as a financial centre rests on a whole host of factors, including: an independent regulatory environment; a business climate that facilitates innovation; easy access to international markets; openness to foreign firms (there are over 1,400 financial services firms in the UK that are majority foreign-owned, from around 80 countries); high quality professional and support services, drawing on an impartial legal system based on common law, which tends to be flexible in responding to the development of financial services so that a large proportion of the world's commercial contracts are governed by English law; soft infrastructure, including market infrastructure, the exchanges, data management, telecommunications, and security, and hard infrastructure relating to connectivity, transport and accommodation; a skilled and diversified labour force; a central geographical location between the US and Asian time zones allowing London to work around the clock; English as the local and international language, etc.

These various qualities are widely acknowledged and depend much on the international openness of the UK financial market, which was first tolerated and then deliberately encouraged by successive post-war governments. During the 1960s and 1970s, the City began to emerge as an offshore centre for trading in Eurobonds, and subsequently as a hub for US banks escaping domestic regulation. The drive to openness accelerated in the 1980s, with the so-called "Big Bang" which opened up Britain's domestic banking sector to international competition, while further encouraging offshore services to operate in the United Kingdom. This has ensured London a fairly unique development among financial centres, with Helen Thompson, for example, noting that "[n]o one has benefited more for the past three decades from the free movement of capital within advanced economies and the free movement of labour within the EU than the City".

Turning to the UK's role in providing financial services within the EU, Britain as a whole has thus become the Union's lead player in a number of key areas. This is true especially for derivatives trading, foreign exchange trading, hedge fund activity and marine insurance, for which the UK accounts for over half of European business (see Table 2). Overall, it is estimated that 35% of EU wholesale financial services activity takes place in London.

It should also be noted that 112 major European companies are listed on the London stock exchange, because it is a larger, more prominent international market offering better trading and liquidity conditions (i.e. the ease with which investors can enter and exit markets, in this case by buying and selling shares in listed companies). Furthermore, 60% of non-EU firms establish their European headquarters in London and the UK, while 40% of the European headquarters of the top 250 companies are based in London.

Table 2: UK Share of Financial Markets in the EU

% share of Europe.

Not surprisingly, the UK and London in particular play significant roles in various markets of euro-denominated assets. It is estimated, for example, that UK banks were holding £1.4 trillion in euro-denominated assets at the end of May 2016, while about 40% of foreign currency denominated loans and deposits in the UK are in euros (equivalent to 17% of all assets held by UK banks).

Average daily euro-denominated foreign exchange turnover in the UK ran to $930 billion in April 2013, equivalent to 44% of estimated worldwide euro-denominated foreign exchange trading: at this level, twice as many euros are traded on the London foreign exchange markets as in all Eurozone countries combined. Liffe – the London International Financial Futures Exchange – is the leading exchange in the trading of short term interest rate derivatives denominated in euro.

Turning to the trade figures, the UK exported a total of £88.9 billion in services to the EU 28 in 2015, including £22.4 billion in financial services and £3.6 billion in insurance & pension services. Total service imports (by Britain from the EU) in the same year were £68 billion, but only £3.3 billion were imports in financial services. Thus, the overall surplus on financial services exported to the EU 28 was £22.8 billion (figures are not available for insurance & pensions). In terms of the UK's overall current account transactions, the surplus of financial services exported to the EU in 2015 was therefore 25.9% of the UK's total surplus on trade in services (see Table 3). This is quite a substantial contribution to Britain's trade, given that the UK is running quite large current account deficit of about 5% of GDP (-£100.3 billion).

Table 3: Service Sector Trade by the UK, in 2015