BREXIT and the British Financial Industry
The financial industry of the United Kingdom contributed 132 billion pounds to the British economy in 2018 which was 6.9% of the entire economical output of the country. With 63 billion pounds worth of exported financial services, the financial industry was also the largest contributor to the trade balance for services with 20.6% of the total volume.
43% of the exported financial services are delivered to the European Union and the quick math tells us this represents 27 billion pounds, or a whopping 9% of the entire British trade balance in services. In this context it is also important to understand, that services form 37.5% of the British total trade balance and are the positive contributor to the trade balance of the United Kingdom. The British financial industry employs 1.1 million people which is roughly 3.1% of all jobs in the United Kingdom. Tendency declining since 2016 but that was to be expected.
Since the introduction of passporting for financial services as a single market in the European Union and European Economic Area, the financial industry in the United Kingdom has experienced a significant boost and quadrupled its annual volume. This was done by a mixture of attributes which made the UK the ’sweet spot’ center of the European financial markets. Besides the direct access to all financial services throughout Europe without the red tape of local regulations, the UK also developed a financial market business model for non-EU countries in being the hub to the European markets.
The combination of passporting, which literally means that once licensed for the British market, every financial institution is also licensed for the entire European Union and EEA member states, the low corporate and capital taxes in the United Kingdom, and the rather liberal licensing regimes for established institutions, made London to the ‘capital of European finance’. Made, because the Brexit deal without even the slightest attempt to create an equivalent status will change this situation drastically as of January 1st, 2021.
With the final execution of Brexit and the end of the transition period on December 31st, 2020, all permissions and licenses under the EU Passporting Directives simply cease to exist and that means nothing less than no longer being permitted without explicit license in each and every member state where the financial institutions operate and mandatory compliance with the local regulations in these countries. Being licensed by the British FCA is no longer adequate to operate on the European single market.
In fact, these will be treated as third country activities to which the full local licensing and compliance regimes apply and contrary to what Boris Johnson’s administration has suggested throughout 2020, this also applies to existing contracts. In addition to that, and again contrary to what Boris Johnson’s administration has suggested throughout 2020, having a single licensed subsidiary in a member state does not provide licensing and compliance for the entire single market. That privilege solely exists for companies in member states of the EU and EEA!
The currently registered British financial institutions have already been formally informed that as of January 1st, 2021, their current licenses are no longer valid and unless explicit local licensing has been achieved prior to this date, cease and desist orders will be enforced resolutely and without ‘grace period’. Suggesting that such ‘grace period’ would exist is yet another flawed statement by Boris Johnson, this time in person.
A statement about the British financial industry made by Boris Johnson in 2020 which is accurate is “the financial industry will have to find new business models before the end of the transition period” and that is already in full swing. Since it became clear that finding a solution for the post-Brexit role of the British financial industry was not even on the agenda of Boris Johnson, a whopping 1 trillion pounds of capital has already been moved from London to EU based funds since 2016 and that sum is scheduled to be doubled by the end of 2021.
EU member states like The Netherlands, Luxemburg, and Ireland, but also Germany and Sweden, are slashing the capital/GDP gap which was, until Brexit, mainly filled by the United Kingdom, and with that actively reducing the demand for financial services from the UK, even if they would obtain licenses. Liechtenstein, Frankfurt, and Dublin have welcomed a growth of registered funds and fund-managers departing London during 2020. Even service providers which specialize in financial institutions have turned their eyes on the European Union and focus less on London’s concentrated customer base.
