Much ink has been spilt discussing the impact of Brexit on Britain’s financial institutions but despite its importance to the future of the UK it remains a little understood area.
In recent times some of the world’s premier financial institutions have chosen to make London their European home, with access to corresponding markets their primary motivation. In accordance with this growth, financial services have become a powerful sector in the UK. Making up 10.7% of the UK economy and delivering a £72 billion trade surplus (our most exported product).
Since the decline of its manufacturing base the UK economy has become dominated by its services sector. This has resulted in the accumulation of huge trade deficits, a trend which has only been exacerbated in the wake of the UK’s decision to leave the EU. December 2017 saw the total good and services deficit grow to £4.9 billion, as a weak pound didn’t see as a big a boost in cheaper exports as expected.
In the face of such an economic outlook, a buoyant services market has kept the UK’s head above the water. So whilst the UK may be heavily reliant on imported goods, it remains competitive on services – with trade surpluses regularly delivered. An integral part of this has been the financial industry and its reputation as being a world leader in its field.
It is perhaps unsurprising then that, according to a House of Commons briefing paper published late last year, the UK has trade deficit with the EU in goods (£96 billion) but a surplus in services (£14 billion). The UK’s exporting of financial services to the EU is facilitated by the ‘passport’ system, a current privilege that will come to an end if the UK leaves the Single Market. To put it simply it means the free exchange of services, meaning banks in the City of London can sell their services throughout Europe without the hindrance of trade barriers.
When it comes to negotiating a final Brexit agreement, there are a few ways that this could be looked at. One is that the UK, due to the EU’s reliance on our banking, accountancy and insurance firms, hold the upper hand. As a consequence, the EU will be pressurised by European business who use these services into maintaining the status quo. Another way of looking at it is that the UK relies so much on Europe as a trading partner and their imports that an ‘off the shelf’ trade deal like CETA (between Canada and the EU) will have to be prioritised. Although these agreements deal only with goods only, the motivation would be the mutual desire to keep tariffs low. The UK will need to fulfil its current reliance on European goods and EU business want to continue supplying a market where there is such a demand at competitive prices.
As Jonathan Ford explained in the Financial Times late last year, the City of London retains a global importance that EU banks simply cannot turn their backs on. A crucial aspect of this is the US dollar markets which are based in London through the CLS International Bank. Combine this with the subsidiaries (and the extra capital needed) that would have to be created by EU and UK banks in each other’s territory to keep current business intact. The loss of the passport rights would signal the end of the current system of bank ‘branches’ in different countries, this is highly efficient in the consumption of capital, so is very beneficial for the entirety of the finance industry.
Losing this system could cause substantial losses in revenue for all of the industry. However, as Ford points out, there would be a disparity in the revenue ‘at risk’ for each institution. For example, UK banks (Barclays, RBS etc.) might lose out but this pales into insignificance when compared to the amounts at stake for European banks such as Deutsche Bank and BNP Paribas.
Therefore, the power the City of London can boast, and the integral position it holds for the operations of European banks, set the tone for this aspect of the Brexit talks. In fact, this much maligned industry could save us from the hardest of hard Brexits.
Ben Campbell works in the charity sector in Birmingham. He is interested in European politics and most recently the impact Brexit will have on British industry.