City slicker or City slacker? The UK financial sector faces Post-Brexit uncertainty
The immediate threat of UK firms losing access to the EU market, of the UK losing its influence over the direction of EU regulations (which the demands of securing “equivalence” status may require the UK to adopt in any event) and of the uncertainty created by such a dramatic change in status (especially if failure to re-join the EEA means passporting rights are lost indefinitely) means that the UK’s pre-eminent status on the global financial services stage appears somewhat in jeopardy.
Many questions hang over operators in the sector as a result of the ‘Brexit’ vote, and the coming months promise to play an era-defining role in shaping what kind of future this key sector of the UK economy can expect. Most of all, and not just for financial services, whether the UK pursues an EFTA / EEA model (or, indeed, decides ultimately to retain its membership of the EU, albeit on a renegotiated footing) or decides to ‘go things alone’ will be of crucial importance.
Many voices in the financial services industry have already made clear their desire for the UK to remain within the EU Single Market with a view to maintaining passporting rights. Whilst the electorate has indicated a preference to leave the EU, it is for the Government to negotiate the UK’s continued relationship with that organisation.
The Government has a narrow majority in Parliament, which will need to approve the detail of any final arrangement. On 14 July 2016, the Chancellor Philip Hammond said that the intention of the Government would be for the UK to leave the single market but to obtain tariff free access to it. This suggests that the EEA option is out but EFTA remains a possibility. That further implies that the UK may well find itself in a situation comparable to that of Switzerland.
It is fair to observe that the legal, regulatory, jurisdictional, fiscal and monetary implications of severing all ties with the EU Single Market would be far-reaching and potentially have an adverse long-term impact on the UK’s ability to retain trade in financial services. However, whilst there are undoubtedly risks, there may also be an alternative ‘reality’, whereby an independent approach with a bespoke regulatory landscape proves uniquely attractive to global business, even if, with the depth of concern the short-to-medium term effects of Brexit has precipitated among existing UK-based financial sector firms, it would be somewhat optimistic to expect these benefits to be realised in the short to medium term.
Whilst far from perfect, the model adopted by the Swiss financial services industry demonstrates that there are work-around solutions – one such example being the incorporation for example of subsidiaries in venues such as Paris or Luxembourg - which are capable of meeting many if not all of the needs of the UK financial services industry in maintaining its international pre-eminence. If there is cause for cautious optimism it perhaps lies in the longstanding history of the City of London for resilience and for finding innovative and flexible solutions to complex cross-border problems. In that respect, Brexit may be seen not as an insurmountable barrier to trade but as business as usual.
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