03 December 2020

NatWest's Green: A note on the implications of Brexit for the delivery of financial services to corporates across Europe

Most of the analysis of the impact of Brexit on financial services has focussed on the consequences for the providers of financial services rather than the end-users, the customers.

Introduction and summary

There will be a major impact on both the availability and cost of financial services for users since providers of financial services from the EU to UK customers or vice versa will no longer have the benefits of free access through the single market arrangements and will likely have only very limited access through the third country equivalence regime. At the same time, the commercial impact of new, post-Brexit, cross-border trade arrangements – presently uncertain - will mean that the financial needs of corporates in both the EU and UK will also change.

It is not possible to say just what the consequences will be for individual customers, as this will depend on the complex interplay between financial firms within wholesale markets and between financial firms and their customers in a significantly changed and more costly legal environment for which there is no precedent.
The impact will vary by sector as well as size and business model. Even corporates who have only UK-UK or EU-EU business models may still see an impact in availability and/or cost of banking services. In addition, it is not possible to know what further action might be taken by regulators beyond the simple removal of market access in certain areas, which will also have an impact on corporates.

Even if an agreement can be reached on a Free Trade Agreement (FTA), this is not envisaged as providing market access for financial services, which is likely to depend upon the EU and UK’s general third country regimes such as equivalence. In the event of a political agreement on an FTA, this might provide the political context for a more cooperative relationship on financial services and potentially equivalence which could reduce fragmentation in some areas. However, the European Commission has stated that it does not intend to grant equivalence for UK-based firms to provide MiFID investment services to EU clients in the short
or medium term.

If no political agreement can be reached, then a less cooperative relationship is likely similar to the no-deal scenario which was contemplated prior to the ratification of the Withdrawal Agreement. However, in either scenario European financial markets are likely to be increasingly fragmented, impacting liquidity and costs for financial services providers and their clients.

The increase in market fragmentation that will result could reduce choice for corporates and increase costs – both in terms of increase in cost of supply but also extra resources required to navigate multiple sets of regulation and, in some cases, book business in a fresh location. It is also likely to reduce market stability as smaller pools of liquidity could see greater volatility. Greater risk concentration could increase risk to everyone bar the most diversified player. Operational burdens are likely to be significant for some users of financial services as well as suppliers.

This note considers in detail the consequences for corporates in both the UK and EU member states of curtailment of the range of different activities provided by banking counterparties. Given the deep uncertainty about how all the changes, introduced on a single day, namely 1 January 2021, will play out, there is risk of
short-term market disruption while firms and their customers seek to establish new patterns of relationships.
The note concludes with a check list of some of the actions corporate customers of financial services firms may wish to consider undertaking.

Detail

Most of the various assessments which have been made of the impact of Brexit on financial services have looked at the question from the point of view of the financial institutions and markets themselves. Many of these have in turn focussed on the legal and regulatory position rather than the impact on the volume or price or complexity of doing business, or how much business might have to be transferred to other vehicles or in what way.

The aim of this note (which was finalised in early -November 2020) is to see what can be said about the impact on corporates and end users in the near term. It does not explore how future regulatory change may subsequently improve (or worsen) the position of final users, for example, whether through potential regulatory simplification in the UK or the implementation of CMU measures in the EU.

It does not cover insurance or pension funds – although many corporates are sponsors of defined benefit pension plans (and a few multinationals have captive insurers). Nor does it address issues of cross-border data transfer or movement of staff, which are of much wider applicability, but also impinge on the deliverability of financial services....

More in PDF below