How Brexit will affect the financial services sector

01 July 2016

The UK’s vote on June 23rd to leave the European Union sent shockwaves through financial markets and the
reverberations will continue for some time to come. Over the last few days we witnessed Mark Carney, President of the Bank of England, pledging GBP 250 billion to stabilise markets, the ECB committing to inject liquidity in financial markets if necessary and the 27th June saw a suspension of trading in shares of RBS and Barclays.

However, beyond the short term response of markets, a Brexit triggers important questions about London’s position as Europe’s financial centre and the UK-based financial industry’s long-term ability to access the European single market. A loss of the EU ‘passport’ would have a profound impact on the sales and distribution strategies of financial firms located in London.

The strong British influence in the EU is also felt at the regulatory level. The UK plays an important role in the three European Supervisory Authorities (ESAs) in the financial services sector in terms of their technical input, physical resources and market expertise. Decreasing UK influence in the ESAs as a result of Brexit will be seen in the final content of legislation as well as on the way European supervisors agree to apply the rules.

In addition, the ESAs are funded through the EU budget and contributions from Member States, in accordance with their size. The UK leaving the EU will likely lead therefore to a decrease in the budget of the ESAs.

Regardless of the timeline for the UK’s exit, a withdrawal process that has not yet commenced, the much sought-after regulatory certainty will hinge on two important questions: how can the UK ensure the EU ‘passport’ for its financial services firms to access the EU singlet market? What domestic legislative changes will the UK have to undertake to ensure access to the EU single market?

In this briefing, prepared with the assistance of external advisers, we provide an overview of how various financial services subsectors might be affected, the daunting domestic legislative challenge the UK will face and the wider impact of Brexit of the EU agenda on financial services. It represents best efforts at predicting the situation in the first week of July 2016.