The Mayor of London, Sadiq Khan, published an opinion piece in the Financial Times lamenting the exclusion of financial services sector from the Brexit deal that was signed at the end of last year. The deal makes little provisions for the financial sector, which has de-facto meant that the British financial companies lose their passport-less access to the EU market, even as their EU counterparts were granted regulatory equivalence by the UK government. Khan writes:
“With great fanfare, Prime Minister Boris Johnson celebrated the Brexit deal agreed before Christmas. But, incredibly, financial services — a sector worth £132bn a year to the UK and employing more than 1m people — has been neglected by a deal that is better for European exporters of goods to the UK than it is for its world-leading service sector. Exports of UK financial services are worth around £60bn, compared with £15bn worth of EU imports. There is no getting around the fact that it was effectively a no-deal Brexit for finance, with the needs of the sector at the heart of UK global competitiveness not only being overlooked, but barely being paid lip-service by this government. The establishment of a solid framework to support equivalence recognitions should have been central to our negotiations. So far, we only have equivalence for clearing houses — a necessity for the EU side so that they can avoid disruption. Chancellor Rishi Sunak has taken the necessary regulatory decisions to allow EU financial services to continue to do business in and with the UK across a range of areas, but he has only said that he is keen to “continue the conversation” with EU partners on their reciprocal decisions for UK businesses. These words provide cold comfort from a chancellor who ought to understand the certainty needed to underpin and expand a global financial centre.”
Khan goes on to accuse Boris Johnson’s Conservative government of neglecting the financial sector in the Brexit negotiations opting to focus on other trade priorities, such as fishing rights, in an effort to appeal to the anti-elitist sentiments of his constituency. Khan claims that this comes at the expense of a sector that is not just the life blood of London, but is also crucial to the UK economy as “fewer than four in ten who work in the financial services do so in Greater London. Nearly 100,000 jobs are in the north-west, and 75,000 are in the Yorkshire and Humber region.”
The Mayor’s disgruntlement is not surprising as the financial sector is the City of London’s largest tax contributor and its importance to the greater UK economy cannot be overstated as it was responsible for 11% of UK’s tax revenues, while employing just 3% of its workforce in FY2019. The Brexit deal jeopardizes London’s primacy as a financial center as it threatens the access of British companies to the European Single Market, the destination of 40% of its financial services exports. This could carry adverse consequences not just for London’s established financial services firms among which are the titans HSBC and Barclays, but also for its booming fin-tech sector.
In recent years, London has produced a number of startups in the payments space such as the digital bank Revolut and the cross-border payments service TransferWise. The prospects of these companies pivots on the political will within the UK government to revisit the trade deal and negotiate favorable conditions for financial services exports, allowing the aforementioned firms to retain their tariff-free access to the EU single market.
In the alternative the UK will have to negotiate separate trade agreements for the financial sector with the EU’s twenty seven member states and British companies will find themselves navigating a complex patchwork of disparate regulations. This will drive up the costs of British financial products, bolstering financial hubs such as Frankfurt (home to the European Central Bank) and Paris in their potential to overtake London in its financial services supremacy. According to the Wall Street Journal, the UK financial sector has already lost £1.2 trillion in assets and 7,500 jobs, which have been transferred to the EU since the Brexit vote in 2016.
The British financial sector can only hope that London’s mayor is heard by the national government and Boris Johnson gets back to the negotiating table to negotiate equivalency provisions for it’s the UK’s most successful export sector.
Overview by Sam Klebanov, Research Analyst at Mercator Advisory Group
