Experts: Andrew Pilgrim, Simon Turner, EY
Moderator: Caroline Burkart - Scorpio Partnership
Following the UK’s momentous decision to leave the European Union, and the subsequent uncertainty surrounding the country’s future trading relationship with the continent, attendees were keen to discuss the potential threats and opportunities for the future prosperity of the UK-based financial services industry.
EY began the discussion by outlining their perceptions of what Brexit could mean for UK-based banks and financial institutions from a regulatory perspective, as well as its impact on the wider UK economy.
- Collectively, attendees voiced a genuine sense of unease in the apparent direction the UK Government is taking with respect to Brexit, prior to the triggering of Article 50 and the beginning of formal negotiations. Many participants believe that political support for the financial services industry has diminished following the EU referendum result and the arrival of a new administration led by PM Theresa May.
- All participants agreed that banks with an existing presence in the UK should already be in the process of scenario planning in preparation for any eventuality in order to avoid possible disruption to commercial activities and growth. All participants acknowledged the difficulty of scenario planning in an environment of continued uncertainty.
- On the upside, delegates unanimously agreed on the structural characteristics of the City of London and its well-established reputation as a financial hub in the global economy. Whatever the outcome of Britain’s future trading relationship with the EU, London remains a complex ecosystem that would be very difficult to replicate in Europe.
The roundtable debate began with a discussion on the implications, vulnerabilities and opportunities of a number of models and scenarios the financial services industry could adopt, following the UK’s exit from the European Union. The conversation then developed further to encompass a number of different issues relevant to Brexit more generally, including the political environment in the UK and Europe, the importance of developing a coherent and united position for the wealth management industry to better lobby UK authorities, as well as the unique competiveness of the City of London.
Scenario planning in an environment of uncertainty
The most pressing issue concerning the financial services industry following the EU referendum result is the growing level of uncertainty in the UK economy. The vote in support of Brexit has clearly undermined the country’s current economic relationship with the EU, and with little clarity at present as to what the terms of departure is likely to be, uncertainty about the future prosperity of the UK economy has increased.
Delegates wasted no time in putting forward their views as to what they considered to be the most likely and threatening exit models for the UK. There appeared to be a general consensus in the room that an adoption of WTO rules, following an unsuccessful negotiation period after the triggering of Article 50, would represent a ‘hard’ Brexit.
Without sufficient transitional arrangements in place, industry experts agreed that some UK banks may find themselves in a difficult position having to potentially set up fully fledged subsidiaries and local branches in the EU in order to maintain access to European markets, in the event of losing passporting rights. Subject to the current passporting system being lost, participants also noted the importance of regulatory equivalence as an alternative mechanism offering access to the single market.
Nevertheless, following individual comments from certain delegates, it appeared evident that the consequences of Brexit, and the issue of market access more specifically, would vary differently across financial institutions due to their inherently different operating models and exposures across the continent.
All the same, many participants were in agreement that banks should now already be in the process of developing scenario plans in the event of a number of potential exit outcomes materialising.
This was identified as being particularly problematic in an environment of growing market uncertainty. For those financial institutions with a branch or subsidiary in Europe at present, the question of market access is not likely to be the most pressing issue. However for those banks with limited or non-existent operational infrastructure in the single market, the impact of Brexit could be more profound if growing trade barriers were to be enacted between the UK and the EU.
Therefore some delegates were explicit in asserting that the threat of Brexit on the wealth management industry is not a sudden cessation of business activity between UK-domiciled banks and the continent, but rather a steady decline in potential sales overtime through difficulties in marketing products and services in the future.
In order to avoid the threat of potential business disruption, financial institutions should prepare plans to securitise access to European markets in time to be sufficiently approved by regulators in Luxembourg or Ireland, for example. As mentioned previously, this could take the form of private banks setting up additional operations in European markets, or to greater consolidation across the industry through an increase in mergers and acquisitions.
Politics in the UK and Europe
Some participants openly questioned the UK Government’s willingness and aptitude in delivering a final resolution that would safeguard access to the single market and prove equitable for the industry as a whole. An overriding sentiment during the roundtable discussion was the feeling that Government remained behind the curve in fully understanding the importance of certain regulatory issues deemed valuable to the industry’s prosperity.
It was acknowledged by some delegates that the previously close relationship between HM Treasury and No 10 during Cameron’s tenure has diminished following the arrival of Theresa May. This is seen by some as a net-loss for the industry as a whole, underlining the perception that political support for financial services is waning.
With upcoming general elections in France, Germany, and Italy in 2017, discussion amongst many participants centred on the belief that political risk in Europe is growing, further undermining market confidence. Nevertheless, in the midst of this insecurity, it was mentioned that the UK’s negotiating position could be enhanced somewhat, bearing in mind the changing political landscape prevailing across the continent.
The City of London – a complex ecosystem
In terms of the threat Brexit poses to London’s competitiveness as a hub for financial services, some delegates were keen to stress that the City is still likely to enjoy a number of structural benefits built up over a number of decades. Overall, the City was described as a highly developed ecosystem of interconnected skills, capabilities, talent, and cultural heritage that would be difficult, and even impossible, to replicate elsewhere in the immediate term. While Brexit would undoubtedly result in some re-balancing of financial services across the continent, talk of the sudden demise of London is premature bearing in mind the diverse and embedded nature of benefits on offer.
A small number of experts from the wealth management industry echoed previous comments about the City and its unique position. They reiterated the point that clients from around the world choose to deposit their assets with UK based wealth managers not only because of the country’s access to European markets, but also because of the UK’s indispensable position as a country steeped in cultural heritage, diversity, the rule of law, and because of its strong provision of healthcare and education.
Moving towards a united position on Brexit
With Article 50 due to be triggered in March 2017 in line with PM Theresa May’s timetable, participants from around the table were keen on stressing the need to promote a common position on what the industry needs from Government during the negotiation period. Some delegates noted the dangers of voicing a fractured argument across banking and insurance for example, thereby undermining the industry’s collective needs and wants as a whole.
In conclusion, the majority of delegates agreed that the best approach to effectively lobbying UK authorities involves forming an industry wide position on what the UK Government should aim to achieve from its negotiations with the European Union.
In closing, it was evident from the discussion that the looming prospect of Brexit has thrown up a number of challenges and uncertainties for UK-based private banks. Unsurprisingly, all financial institutions should be in the process of assessing the implications of a number of different economic and political scenarios on their operational and strategic capabilities. The uncertainty around the UK’s exit from the EU is unlikely to abate anytime soon, therefore banks should be in the process of regularly conducing scenario planning as the political environment continues to evolve.