A Post-Brexit Reality Check For the UK's Financial Services

The Boris Johnson administration is fighting failures on multiple fronts—and behind the headline-grabbing sleaze investigations and Covid stats, Brexit is still proving to be a lingering issue. Teething problems have turned into chronic pains for multiple business sectors caught in the middle of cross-Channel politics. The financial services sector—which some have dubbed the “crown jewels” of the UK economy—are a particularly apt case study; the notion that the UK will lure in large amounts of financial activity after a wide-ranging regulatory bonfire has proven to be an illusion.

The Financial Times has reported that “the post-Brexit trade deal struck in late 2020 made precious little provision for financial services, and since then Brussels has refused to offer London anything like the same market access arrangements — or equivalence — that financial centres including New York, Tokyo or Hong Kong enjoy.”

Since then, those following events and discussions between the UK Government and the EU will note that a memorandum of understanding on regulatory dialogue has sat “unsigned gathering dust on the shelf” — a casualty of EU anger over the UK’s demands to redraw the Northern Ireland protocol.

In the EU, financial capitals have reported a growth in activity as firms are forced by regulations to shift business from the City of London. Two dozen large financial services firms have announced plans to move £1.3tn of assets from the UK in the aftermath of Brexit, according to research from EY.

Reports in the Financial Times and other media identify Paris as the “big winner” with the French capital luring bankers and financial firms with tax breaks and other incentives. It has attracted 2,800 UK employees since Britain voted to leave the EU in 2016, according to EY. The bulk of roles being transferred to the continent are in trading as France capitalises on the existing expertise of its main banks in many derivatives markets. A number of US banks have also chosen Paris as one of their EU bases; among them is JPMorgan, which is due to grow its staff from some 250 to 800 people in France this year.

London, meanwhile, has lost its crown as the main hub to trade shares in Europe—Amsterdam has assumed the throne as tough rules from Brussels curbed cross-Channel dealings. There are even examples beyond the City: Euronext, the EU’s largest stock market operator, is moving the data centres that house all its trading from Basildon in Essex to Bergamo in Italy.

To add to this litany of post-Brexit woes, an increasing number of European financial services firms are interested in continuing to be authorised in the City. A Freedom of Information request has revealed that only half of EU firms that were given a temporary license to operate in the UK immediately after Brexit have applied for full authorisation.

City AM reported that the Financial Conduct Authority (FCA) had set up a temporary licence regime in the months before Brexit in order to give European Union-based firms the opportunity to continue trading in the City while final rules and regulations were worked out. The temporary licences, dubbed ‘landing slots’, were created to support firms that were passporting into the UK before Brexit and it was agreed that they could continue to operate if they applied for full authorisation from the FCA or the Prudential Regulations Authority (PRA). However, Financial News found out that only half of the firms that were awarded landing slots did indeed apply for full authorisation in Britain, implying there is little or no appetite among some firms to remain active in the UK.

Even after the FCA wrote to dozens of firms over the summer, applications reportedly did not increase. On 30 September the window closed, with only 39 out of 72 firms that were expected to apply actually doing so. This means that 46 per cent did not apply to the FCA, significantly higher than the regulator’s initial expectation of about 20 per cent.

The UK's service-based economy, lacking in the traditional industrial manufacturing we had in the 1950s, for example, will continue to lack stability if we do not protect key drivers like financial services. Ongoing uncertainty surrounding the post-Brexit agreement with the EU will be another very serious blow to the UK economy and the much-needed levels of investment and revenues the City brings to the table.