Mark Boleat is a commentator on public policy issues, specifically Brexit, finance and housing.
Brexit will impact significantly on the financial services industry, as much of the industry is international, taking advantage of the “passport” to run entire European Economic Area (EEA) activities from London. The industry has been significantly involved in policy discussions on Brexit, seeking an outcome that as far as possible mirrors the current “passporting arrangement”. This is achievable and would make sense from an economic perspective for the whole of the EU, but it is unlikely to be achievable politically.
Regardless of the debate on the future, financial institutions have to manage the impact of Brexit on existing business. Financial services businesses are heavily regulated and have demanding customers, while many engage in long-term transactions. They are expected to manage risks intensively.
There is a risk that from March 2019 Britain will not be in the single market. It matters little whether the risk is 5% or 100%; the risk has to be mitigated. So all financial services businesses must assume a worst-case scenario. Regulators are also requiring this. The Prudential Regulation Authority was explicit in this respect in a letter to authorised institutions on April 7 2017.
For the most part the financial services industry will manage Brexit – but doing so means business, employment and tax revenue lost to the UK.
There are also some major short-term issues that need to be addressed. These were spelt out in last month’s Bank of England Financial Stability Report. There are many financial services contracts in force now that run on past the day when Britain is due to leave the EU. It follows that if passporting ends, the ability of institutions to service those contracts will be adversely affected.
The report identified over-the-counter (OTC) derivative contracts as being particularly affected. The gross amount of affected contracts is around £26 trillion with £12 trillion maturing after 2019 Q1. Banks are looking at options including seeking local permissions and “novating” contracts to a legal entity in the EEA – something that is virtually impossible in the timescale.
This is a similar position with insurance contracts. About £20 billion of insurance liabilities and six million UK policyholders could be affected because their policies are with an EEA insurer other than the UK, and the figures are even higher for EEA policyholders with contracts with UK insurers. Transferring business to an EEA or UK insurer in the required timescale is not possible. The Association of British Insurers has warned that this problem must be resolved by the end of this year.
It now looks as though there will be a transitional agreement, which will broadly maintain existing arrangements. But to cover the issues for OTC derivative and insurance contracts it needs to be“bankable”, that is legally enforceable. There are issues that need to be resolved in this respect. The transitional agreement is subject to “nothing is agreed until everything is agreed”, but as the Chancellor has said such an agreement is a wasting asset. And the second issue is constructing the transitional agreement in a way that is legally binding.
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Edited by Hugo Dixon
As financial services activity drains away from London, so will taxable capacity. Public services at a decent level will become less and less affordable.
Richard is absolutely right, but try telling that to people. In my experience they will merely shrug and either deny the connection or claim that it will only affect ‘fat cats’ in the City. There must be a way of estimating the amount of tax revenue lost if this or that bank moves all or part of its business out of the UK; and indicating the scale of additional austerity measures that will be needed to plug the gap. Trouble is, I’m not sure how to go about it.