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Brexit and Financial Services: What Comes Next?

Document Cited authorities 4 Cited in Related
Vincent
Date01 January 2018
DOI10.3366/elr.2018.0467
Published date01 January 2018
Author
Pages149-155
INTRODUCTION

Like many areas concerning Brexit, accurately predicting the outcome of negotiations concerning the provision of financial services and future developments is problematic. The Brexit White Paper states “In our new strategic partnership agreement we will be aiming for the freest possible trade in financial services between the UK and EU member states”.1 At present, financial service providers based within the single market benefit from “passporting” privileges. Passporting, formalised by the second banking directive of 1989,2 allows institutions established in one member state to freely provide and access services in other member states, with further passports issued to EEA states. Compliance with a common minimum regulatory standard as a condition of continued single market membership facilitates trading through passporting.

The UK and the remaining EU-27 states benefit from passporting due to the different concentration of expertise in financial matters across the Union. It is far easier to access financial expertise across borders through enabling the provision of a service rather than by relocating individuals. “Freest possible” trade would entail remaining a member of the single market. Yet there have been repeated statements that the UK will leave the single market. Accordingly, the relationship will at least be different.

 INTERESTS OF THE UK, SCOTLAND AND EU-27 IN NEGOTIATIONS

Passporting rights create a strong incentive for institutions to maintain a presence in an EU member state. As CityUK states, “There are more head offices of banks in London than in any other place in the world…There are also over 250 foreign banks with an office in London. This is higher than nearest rivals New York, Paris and Frankfurt”.3 Therefore, one of the aims in negotiations is to prevent overseas financial service providers from withdrawing institutional representation from the EU post-Brexit.

Passporting rights are only one part of the equation however. If all single market states were equal, in theory it would make no difference in which state banks are established. There must be another reason why London specifically hosts a higher concentration of overseas financial institutions. This relates to the particular expertise located in London. CityUK state “London is the second largest global fund management centre. It manages more than 80% of hedge fund assets under management in Europe, 90% of European prime brokerage, and is the leading centre for management of European private equity funds”.4 These statistics indicate that the UK has a highly tradeable service of value to the EU-27. Michel Barnier is reported to have affirmed to MEPs in January 2017 his preference for a “special” relationship to maintain access to the City post-Brexit.5 His comments reflect the risk that, unless a deal is reached, financial instability will spread to the detriment of national economies. This indicates that the sector is a trump card for the UK in negotiations.

From a UK perspective, losing passporting rights means it may no longer be as attractive a place for establishment, which may lead to...

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