BUS614: International Finance

Brexit may have a big impact on financial services produced in the United Kingdom, depending on how exactly it unfolds which is almost impossible to predict. London is one of the world's top two leading financial services centres, jockeying year-in, yearout with New York for top place. Its position stems largely from the very high level of international, offshore financial activities operating in the City, and more generally in Britain's capital markets. Taken as a whole, financial services (including insurance & pensions) contributed £55 billion in net export earnings to the British economy in 2015, provide 1.1 million jobs nationwide, and 11% of tax revenues to the UK government. Given the place of the City of London in Britain's historical economic model, and that on balance the City and London supported remaining in the EU, it has been noted that the Brexit vote is the first time the City has lost in British political life since the 1930s.

Much will depend on how relations between the UK and the EU evolve. Until the start of 2017, the key question concerning the impact of Brexit was linked to whether or not banks and financial services companies operating in the UK would continue to have "passporting" rights to operate throughout the European Union's Single Market. On Tuesday 17 January 2017, however, Theresa May finally ended months of ambiguity about what exactly "Brexit means" by stating that control over immigration and the ending primacy of the European Court of Justice's jurisprudence over UK law would take priority over continued British access to the Single Market. Her speech was followed up by a White Paper published at the end of January 2017 which provided more detail on the Government's position. In principle, banks operating out of the UK will therefore lose such passporting rights. Tellingly, TheCityUk – the key lobbying group for UK-based financial and related services industry – had already dropped its demand that UK-based banks retain passporting, just a few days before Mrs May's speech.

That said, the British government is still holding out for a bespoke agreement between the UK and the EU, a customised arrangement that will be different from existing agreements the Union has with other, closely associated countries (such as Norway, Switzerland or even Turkey). On the whole, the reactions from Britain's European partners to Mrs May's speech have been fairly consistent, insisting that negotiations cannot begin before the UK notifies its intention to leave under Article 50 of the Treaty on European Union, and stressing that Britain cannot be better-off in its relationship with the rest of Europe, having left "the club".

On finance, however, there are concerns in the EU about London and UK-based financial services being shut out of the Single Market. These have not been stated officially, but have leaked out from statements made by Michel Barnier (the EU Commission's Chief Negotiator on Brexit) in January 2017 and a leaked document of the European Parliament (see below). Such concerns are not surprising, given the interconnectedness of global finance and the services which the UK (and London especially) provide to the rest of the European Union. In view of the continuing weaknesses and uncertainties hanging over the world economy and the many unresolved structural problems which global financial markets and banking face, there are indeed good reasons for worrying about the implications of Brexit for the UK and European financial markets. This is especially so if Brexit turns out to be a "cliff edge" break with the EU in spring 2019, when the two-year negotiation period ends, and if no satisfactory exit agreement is established.

At the time of writing the reviewed version of this text (early February 2017), it seems certain that the British government will notify the EU of its intention to leave by the end of March 2017. Other things being equal, this should mean that Britain will leave the Union in spring 2019, before the next European Parliamentary Elections. To be sure, political events may upset this schedule, given the state of flux of British politics and indeed global politics (notably following the election of Donald Trump as President of the United States). The political divisions opened up in the UK by the referendum are far from over, and profound conflicts of interest within the UK show no signs of abating (especially concerning Scotland and Northern Ireland). Similarly, the potential for disagreement between the UK and the EU is considerable, especially concerning Britain's legacy budget obligations to the EU (which could run from anywhere between €20 billion and €60 billion), EU migrants' rights, the Government's newly stated wish to remain in the EU customs union yet at the same time negotiate independent trade deals, etc. Even more worrying could be the impression that parts of Britain's political establishment are actively siding with the new Trump administration to encourage the EU to break-up.

Given the unpredictable nature of politics now within the UK, and within the wider Western world as a result of the election of Donald Trump, it is impossible to cover all possibilities of how Brexit may now unfold and what it entails for financial services. This article therefore concentrates on what seem today to be the major questions involved in terms of Britain leaving the EU in spring 2019. Section 1 begins by outlining the main characteristics of the UK's financial services and how they operate internationally, as well as the scope of existing EU business. The next section examines what the loss of passporting rights might entail, and sets out some of the key questions concerning an "equivalence" regime. Section 3 then deals with the possibilities of transitional arrangements, the dangers of so-called "cliff edge" or "train crash" Brexit, including the risks to the EU were this to occur.

Source: Nicholas Sowels, https://journals.openedition.org/rfcb/1331
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