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NFDA EU Referendum report: Finance and Financial ServicesBack

EuropeanThe arguments surrounding the effects of Brexit on finance and financial services is a complicated topic that is often lost in the economic debate. Both sides argue that the other will result in the collapse of the City of London as the world’s financial headquarter. This is a heavy weighted topic, that has often been lost in politically biased translation.



London based company, Fair Finance, states that Brexit would have a mass impact on SME business funding. The argument is based on recent history, evidenced during and post the recession, where bank lending to SME’s has starkly reduced. Fair Finance analyst, Dominik Sokalski states:

“There is a real risk banks will reduce their lending to SMEs [in the event of Brexit], in order to mitigate against further risk. This would have a negative impact on economic growth and the long-term battle to increase UK productivity and investment.”

Lending is crucial to the success of the UK’s economy as the majority of UK businesses are micro-small enterprises. The continued culture for ‘start-ups’ can only be supported with investment, Remainers argue an unsettled economy, resulting from Brexit, will prevent investment and ensure banks reduce lending further to avoid financial crashes.

Furthermore, a somewhat defensive statement from Remainers, although a fair one, is that it is unlikely financial regulation would decline in the event of Brexit – something Brexiters often argue would occur. In 2015, the Bank of England’s stress tests were tougher than the European Banking Authority’s (Giles William and Clive Briault, in Stress tests: another way to impose higher capital requirements).

Financial Services

In regards to financial services, the Remain camp considers that Brexit would reduce British-based institutions from selling their financial services in the EU. In 2013 (latest figures), exports of financial services to the European Union amounted to £19.4bn; imports were £3.3bn. In 2014, ‘the amount of investment in the UK’s financial services sector, by companies based across the world reached £280 billion – 17% of this was from the EU’. The UK also exported over £22 billion worth of financial and insurance services to the EU’[1]. Government and Remainers argue that this would not be replicated post Brexit.

The Government, a firm Remainer in the debate, also states that ‘across all sectors of the economy, almost three quarters of foreign investors said the UK’s access to the EU market was an important factor behind the attractiveness of the UK as a destination for investment’ (HM Treasury).

Those in favour of the EU put forward the argument that the UK is an important influencer in the EU’s financial services’ regulations, they cite that:

  • Britain was successful in overturning a European Central Bank decision to force clearing houses settling euro-denominated contracts to relocate to the euro-zone.
  • The United Kingdom helped to stop the financial transactions tax, proposed by core euro-zone economies, being implemented across the whole European Union.

The UK Government has also pointed to the number of jobs created because of the UK’s strong finance industry. ‘The financial services sector in the UK employs over 1 million people with around two-thirds of those jobs outside London’, with ‘285,000 jobs across the UK linked to financial services exports to the EU’, 100,000 directly and 185,000 linked to indirect demand generated in the wider economy because of exports’ (HM Treasury).

In a report published by independent think-tank, Open Europe, it was articulated that securing free trade with the EU after Brexit is highly likely in the goods sector but ‘far harder’ for the services sector. This is a crucial sector for the UK economy as the majority of industries and thus jobs fall under this category, rather than goods, which is more manufacturer based. The report states that ‘the 35% of the UK’s goods exports to the EU could be subject to high tariffs (above 4%) upon exit – in sectors such as cars, chemicals and food – and the highly regulated financial services sector would be particularly vulnerable to the initial disruption.’

‘For services sectors, and financial services in particular, guaranteeing seamless access to EU markets for UK businesses will be more difficult, not least because the UK has a deficit with the EU in goods, but a surplus in services.’

‘All sectors would suffer from the UK’s loss of voting rights in the EU, but for industries such as the financial sector the impact could be greater since the barriers to entering European markets could be increased by new EU regulations over which the UK has no votes.’[2]

Sir Vince Cable also added weight to the argument that leaving the EU would impact negatively on services, notably financial services. Cable stated “[t]he Brexiteers inhabit a bygone age when trade was just about goods, rather than services, and negotiations were just about tariffs. I believe in the World Trade Organisation and was heavily involved, professionally, in an earlier round of negotiations. But sadly, unlike the EU Single Market, it is making very slow progress on services and non-tariff barriers.”

Referring specifically to Scotland, Economic Secretary, Harriett Baldwin, highlighted the importance of the financial services sector to Scotland in a speech delivered on 13 May 2016. During this, she spoke of Scotland boasting the UK’s next two largest international financial hubs in Edinburgh and Glasgow and how the sector contributes more than 7% of Scotland’s GDP; employs around 85,000 people, with a further 70,000 working in associated professional services. Following a Brexit, Baldwin stated that leaving the EU would put tens of thousands of these jobs at risk. “It is clear that for Scotland’s future prosperity that there is no credible or, in fact, more desirable alternative to EU membership.”

On 12 May 2016, the Economic Secretary also spoke in Belfast, to dispel ‘the myth that leaving the EU would simply be a problem for the City in London and that the wider UK financial sector, in places like Belfast, would not be affected.’ She stated:

“While a vote to leave would significantly weaken the UK’s financial services industry, with consequences for Northern Ireland’s status as a financial hub.”

“The financial services industry in Northern Ireland is going from strength to strength and is great success story. It makes an important contribution to the local economy and employs around 21,000 people with a further 15,000 in related professional services.”

On a trip to North Wales which took place on 19 May 2016, Baldwin also spoke about the impacts Brexit would have on Wales’ financial services sector, paying notable attention to the likes of Bangor and Wrexham. Joined on the trip by Guto Bebb, Parliamentary Under-Secretary of State for Wales, Harriett

Baldwin highlighted the importance of the Welsh financial sector and its £2billion contribution in 2014 to the Welsh economy; with it supporting over 50,000 jobs in Wales (33,000 directly and 24,000 in associated professional services).  The duo stated that ‘Wales is an emerging force within the financial sector, increasingly host to the businesses and services which underpin the UK’s world-leading financial industry’ of which Brexit would jeopardise this progression.

Passporting rights

When looking at the points put forward by Remainers as to why the UK must remain within the EU, finance and financial services is argued as a key. This is based on the premise that through membership the UK receives huge benefits in the realm of financial services as it is given passporting rights. “Passporting rights” enable UK firms to operate throughout the EU and provide their services unrestricted or without need to create subsidiary companies to operate within a nation state.

Lord Jonathan Hill, the UK’s Commissioner for financial services, said EU governments would be more determined to use a Brexit to secure a “competitive advantage” over the UK and would “roll out the red carpet to our bankers” as a result of the Leave campaign’s rhetoric. He warned that a Brexit would mean financial services companies operating in London would lose the right to operate across the continent, [passporting rights] (23 May 2016 – Telegraph).

Passporting rights is not a privilege guaranteed in trade agreements with non EU member states; Swiss banks do not have these rights and these will also not be part of the Canadian agreement. Canadian financial services providers will be unable to supply directly to the EU market, having to establish subsidiaries inside EU member states, operating under EU regulations, to provide these services.

Lord Hill also cited the warning of Xavier Rolet, the chief executive of the London Stock Exchange, who said a Brexit would be “beyond devastating for the City of London.”

Note: Figures from the Office for National Statistics* show that there are currently (2015) 390,000 employees and self-employed people working in financial and insurance activities in London. This has grown from 362,000 in 2013 and 365,000 in 2014.

Banks such as HSBC have warned that it could ‘shift 1,000 investment banking jobs from London to Paris if the UK leaves the EU’ (Guardian).

*Jobs in London by industry, 1996 to 2015 (Standard Industrial Classification (SIC) 2007 section).



In regards to finance, Brexiters immediately point to the Eurozone. Providing finance is dependent on stable economies. It is fair to say that the Eurozone is not a stable economy and this is at the centre of the EU. Furthermore, as Gerard Lyons (Economists for Brexit) states ‘the UK did not achieve a veto to protect it from greater control by the Eurozone… In recent years, there has been increased tension between the Eurozone and non-eurozone members, with the European Court of Justice (ECJ) having to decide on areas of contention’.

FT commentator Merryn Somerset Webb, summaries the Brexit sentiment concisely, stating “[l]ook at Schengen, at the failure of ECB monetary policy, at the probable solvency problems of both the eurozone’s big banks and its big countries (France and Italy being the obvious) and you must accept that it is likely the eurozone will see an existential crisis in the next few years. That will push the top management to demand higher levels of belief — more integration, not less. That might work — or it might blow the whole thing up as people make it clear they believe in their own nations more than they do in the EU. Either way, as the Brexiters say, better to watch from a comfortable lifeboat in the Channel.” (4 March 2016).

The argument from the side of Brexit is clear, the UK finance industry would thrive better if the UK was not a member of the EU because of the influence of the Eurozone. This would enable the UK to develop national financial policy, of which our investors will have to comply.

Financial Services

Brexiters argue that the UK has not been able to stop the EU passing unwanted regulations in the financial services sector, this is a loss of sovereignty which they believe Brexit would enable us to regain control over. These include:

  • The United Kingdom’s failure to stop the introduction of a cap on bankers’ bonuses in 2013.
  • The 2012 unsuccessful attempt to prevent the union from introducing new restrictions on short selling.

Not only has there been unwanted regulation but those wishing to leave the EU point to the amount of legislation imposed on financial services as further reasoning to why the UK must leave. As stated in Gerard Lyons chapter in The Economy after Brexit, he points to the 2014 UK Government competency review on the financial services as proof of this. “Over the last ten years, there has been a roughly ten-fold increase in the volume of EU law on financial services.”

Brexiters argue that leaving the EU would result in the UK taking back control over financial services’ regulations and imposing those that are best for UK. As the UK is Europe’s financial services hub, they believe that

Furthermore, Brexiters argue that financial service firms are not as prevalent in London as they once were** and therefore this reason to remain in the EU to protect the financial services industry does not hold as much weight as perhaps it did before. They are that if those threatening to leave, such as HSBC, did so, it would not be as large a proportion of the City of London as once was – the effect would be far less damaging.

Figures from the Office for National Statistics, Capital Economics** show that around 16% of the stock of office-based jobs within London are for financial services. Over 2014 and 2015, financial services accounted for only 6% of new jobs created in London, with 50% being made up of professional scientific and technical office-based jobs.

**% of London office-based jobs by sub-sector (latest = Q2 2015)

Passporting Rights

The Brexiters acknowledge the concern that the UK would lose passporting rights if it was to leave the EU. However, they believe this would not be the problem that has been purported by Remainers. Leavers state that ‘because the single market in financial services has not worked particularly well, the business model of many firms is that they already have local representation for the retail sector in many parts of the EU. In wholesale markets, some non-EU firms have indicated that although some corporate restricting may be needed, the vast bulk of activity will still take place in London’ (Gerard Lyons).


The ability for the UK to sell financial services to the EU is important, this is a point accepted by both camps, however, the real debate is to what extent the UK needs its banks to have passporting rights. Remainers argue the UK’s financial sector would not survive without them, not without real difficulty and expense, the Brexiters argue strongly otherwise and that not much would change.

As summarised by Woodford Investment Management, ‘[l]osing these [passporting] rights could mean that banks would just have to set up a brass plate subsidiary in the [EU] to process business essentially still done in London. But it is also possible that it would prompt the UK to lose large amounts of business to the EU.’ This conundrum follows the pattern of many other policy debates surrounding the EU Referendum.  It is again a case of theoretical judgements. However, unlike most other policy areas, where academic opinion is split, there is limited weight on the side of Brexiters.

So what do we know?

A few points in this policy debate certain. The first is in regards to the Swiss model, which is arguably now the most favoured trade model for the UK in the event of Brexit. The sticking point here is that it is ‘unlikely that the UK would get a deal with the EU as good as Switzerland’s. The Swiss negotiated their deal when they were planning to join the European Union; there would be less goodwill for a country leaving it.’ (Woodford Investment Management). It is hard to argue against this point. A complete replica of the model is unlikely.

Secondly, regardless of remaining in the EU or leaving, the UK needs to ensure its financial services sector remains strong and continues to growth with investment. As described by the Telegraph ‘London is the world’s leading international financial centre, with extensive links across Europe… The UK financial and related professional services industry spans the length and breadth of the entire country. …Two thirds of the nearly 2.2m people working in the industry do so outside London. This is critically important. After all, the relationship between London and our thriving regional financial centres is a mutually beneficial one. If the City is the heart, those centres are the vital organs. Strong regional centres increase the global appeal of London by widening the talent pool and offering growth opportunities for firms based here.’

And what are we still unsure of?

However, the split again becomes apparent as Remainers state that ‘although Britain could retaliate with its own barriers to trade in financial services [if the EU played difficult], [Britain] has much more to lose given the disparity in trade. Indeed, ‘financial services are the part of the economy where trade negotiations probably stand the smallest chance of success’ (Woodford Investment Management).

This is in stark contrast to Brexiters that state the UK has too much weight to be left in a bad position. ‘London remains responsive to new ideas and has managed to position itself well in growing markets such as Islamic finance, sovereign wealth, the offshore Chinese currency market, carbon markets and dispute resolution. Even the increase in global regulation is a growth area for London. London’s position is truly impressive and highlights its global reach… In some respects, we could learn from Americans. Their dominance means they have securities regulation that forces firms and individuals to have a US presence or qualification to do business there. The extent to which London dominates European finance means we could seek such an ‘a la carte’ menu here’ (Gerard Lyons).

The two arguments come down to one main point. It is unlikely that the UK would lose its name as the home of Europe’s finances. It is unlikely that cities such as Paris or Frankfurt would take over. London survived from outside of the Eurozone and would no doubt do the same from outside of the EU. However, it is hard to imagine this would not come at some cost. A cost that would arguably be hard for the UK to digest in its sensitive economy and would undoubtedly impact on employment. Whilst the UK would remain the hub, it is hard not to imagine that employment would not take a hit. The costs of newly imposed tariffs would need to be accounted for, as well as the costs of financial institutions setting up subsidiary companies as they expand across Europe. Employment within the UK’s industry may be here be impacted.

Concluding remarks

Furthermore, non-European Economic Area institutions may soon face even bigger barriers to providing financial services within the European Union once the Markets in Financial Instruments Directive II rules are introduced in January 2017. This is a point not addressed by Brexiters.

In essence, these rules force non-European Economic Area providers of financial services to have equivalent levels of regulation in their home country before doing business across the European Union. Arguably, this contradicts Brexiters beliefs that leaving the EU would ensure national regulations and sovereignty gains for the UK’s financial services industry.

[1] EU referendum: 6 reasons why the EU is good for financial services jobs – HM Treasury (12 May 2016)

[2] Open Europe: The impact of Brexit on the UK’s key export sectors: Christopher Howarth, Mats Persson, Pawel Swidlicki, Raoul Ruparel, Stephen Booth


Posted by Sue Robinson on 27/05/2016