Beyond ‘passporting’, what lies ahead for the UK Financial services?
March 18, 2021
Negotiations on future financial services regulation between the UK and EU is due at the end of March 2021, however, as the deadline approaches uncertainty remains. Under the new EU-UK Trade and Cooperation Agreement, the two parties aim to reach a Memorandum of Understanding (MOU) by the end of this month, setting out a framework for regulatory cooperation in financial services – the UK’s most valuable export sector with an annual value of around £60bn. In 2020/21, our study finds the sector to contribute £122bn to the UK total GVA and between £71bn and £76bn in taxes (about 10% of the total government tax receipts). While the UK Chancellor, Mr Sunak, sees the prospect as a second ‘Big Bang’ for the City of London, one of the biggest challenges for the sector is losing the EU ‘passporting’ rights.
So, what is ‘passporting’? It is an EU system offering financial services companies, which have been authorised in one EU Member State, the rights to operate and trade freely in another without the need to seek new authorisation. Removing this time-consuming and usually expensive procedure has been the foundation of the EU single market for financial services.
Under the new arrangement, from 1 January 2021 banks and financial services companies from both sides of the Channel have automatically lost their ‘passporting’ rights. What this means to the UK is that around 5,500 UK-authorised firms that have passported their authorisation into Europe are impacted according to the Financial Times. For capital markets, the first trading day after the end of Brexit transition arrangements saw €6bn (approx. £5.3bn) of EU share trading shifted to European platforms as EU banks and asset managers must now use EU platforms for euro share trading. So far, UK based asset management firms have moved more than £1 trillion in assets to Europe with Dublin, Luxembourg and Frankfurt being some of the most popular locations. The lucrative IPO market has also been disrupted, with some leaning toward EU-based listings in Frankfurt, Paris and Amsterdam. InPost’s plans for Dutch listing, valued at around €7-8bn (£6-7bn), is one of the latest examples of US-owned companies seeking a EU-based listing venue.
However, the UK’s long-standing role as the world leading financial centre is unlikely to fall overnight. On the contrary, the latest Global Financial Centres Index (GFCI) reveals that London has increased its rating by 24 points since March, only four points away from overtaking New York to regain its position as the top financial centre in the world. Our recent study shows that the UK IPO market remains Europe’s most active market amid Covid-19 and Brexit-related uncertainties. While European IPO proceeds in 2020 suffered a 10% drop compared to the previous year, the London market is likely to exceed its 2019 levels, with more than £5.5bn raised in 2020 and a further £1.3bn in just one month of 2021.
How about finance jobs? A Financial Times survey of 24 large banks and asset managers reveals that the initial warnings of a dramatic employment shift post-Brexit at the scale of tens of thousands is yet to happen. Instead, the majority of international banks and asset management companies have increased their UK headcount over the past five years, with nine of the world’s largest asset managers increasing their combined headcount by 35%.
Beyond ‘passporting’ and the MOU, the EU and the UK can ease cross-border trading by recognising each other's standards or regulatory regimes in certain areas of financial services - a practice known as equivalence. While the UK has granted the EU equivalence in 22 areas, the EU has only temporarily recognised UK clearing houses, so there is clearly more to be done here to improve mutual market access. Absence of such an arrangement would negatively impact both parties, resulting in a 0.3% loss in annual GVA for the EU27 and 1.3% loss for the UK by 2030 according to our study.
Going forward, while some friction in cross-border trading is expected, what lies ahead for financial services will depend on the willingness of both sides to cooperate for mutual shared interest. Regardless the City of London should remain a critical centre of global finance for many years to come.