Photo by Sven Hansche/Shutterstock
Financial and professional services: pre-Brexit
Financial and professional services exports make a major contribution to the UK’s trade balance. The financial services trade surplus was £50.8bn in 2016. Professional services had a further surplus of £14.7bn, making a total of £65.5bn. Table 8.3 gives some key statistics.
(The definition of professional services includes total legal, accounting and management consulting services. Part of these services does not relate directly to financial services).
The financial services industry also contributed GVA of £115bn (7.2 % of the economy). Professional services contributed a further £66bn (3.8% of the economy).
The tax contribution from financial services for 2015/16 was £71bn.
The UK industry has close links with the EU. For example:
- 5,500 UK-authorised firms hold passports to the Single Market;
- 8,000 EU-based firms use passports to access the UK market.
- Around 25% of UK financial services revenue is related to the EU (Oliver Wyman).
- EU workers account for 15% of the combined workforce in both industries.
Freedom of movement facilitates UK exports in financial and professional services to the EU27.
Source:
ONS employment statistics, ONS Pink Book 2017 (tables 3.5 and 3.8)
Oliver Wyman, The impact of the UK’s exit from the EU on the UK-based financial services sector, 2016
Financial and professional services: expected Brexit impact
Back in October 2016, an Oliver Wyman report concluded:
- Connections between activities and firms mean the effects of Brexit will be wider than simply reducing business with EU clients.
- Without regulatory equivalence granted by the EU, severe restrictions could limit the EU-related business that UK-based firms can do.
- Under a WTO Brexit, 40-50% of EU-related activity (about £18-20bn in revenue) and 31-35,000 jobs could be at risk, along with £3-5bn of annual tax revenue.
- Brexit will harm businesses that rely on firms that leave or close. This puts at risk an extra £14-18bn of revenue, 34-40,000 jobs and ~£5bn in annual tax revenue.
All major UK-based banks prepared their plans for Brexit and have implemented them. The banks could not delay because it takes a long time for regulators to approve new EU-based entities and for firms to change operations and technology.
The Association for Financial Markets in Europe (AFME) detailed the complexities involved. As the two-year period to March 2019 was not long enough for many banks to make the necessary changes, AFME concluded that a further transition period of three years would be needed. The actual transition period was for only 21 months. Banks had to act.
When the UK left the Single Market, passporting for UK banks ceased. One option would have been for the UK and EU to recognise each other’s financial services regulation as equivalent. However equivalence is more restrictive than single-market membership and leads to additional costs through regulatory duplication. The EU also has the power to revoke regulatory equivalence at short notice. This risk creates uncertainty for the UK and gives the EU leverage.
Jobs and assets moved to the EU
For financial services businesses moving from the UK to the EU, Dublin was the favourite destination followed by Luxembourg, Frankfurt and Paris (according to an EY survey). Some business activity (for example, the booking of transactions) had moved to the EU27 to keep things simple for customers and regulators. The Bank of England expected that in the long run (based on the banks’ own plans), the UK could lose up to 75,000 jobs as a result of Brexit. The European Banking Authority had moved from London to Paris with about 200 jobs.
Job losses were expected over an extended period to around 2024. Not all moves or job losses were announced or visible. In addition, the UK loses out on future new jobs that will now be created in, say, Frankfurt or New York rather than London.
The EY survey reported:
- 7,500 jobs leaving London because of Brexit.
- Since 2016, 40% of firms (88 out of 222 that EY monitors) have confirmed Brexit moves or potential moves to at least one EU location. Twenty-six confirmed multiple locations for relocating staff and operations.
- 34 opted for Dublin
- 26 for Luxembourg
- 23 for Frankfurt
- 20 for Paris
- £1.2 trillion of assets are moving (based on those that have declared the value publicly).
- 24 of the larger firms (10 banks, 9 insurance providers, and 5 wealth and asset managers) have announced they intend to transfer assets out of the UK to Europe ahead of Brexit.