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Impact of the EU on UK financial services sector
The UK financial services sector contributes slightly more than 7% of UK GDP, employing more than one million people, of which two thirds are based outside London. The sector exports around 33% of its financial, insurance and pensions services exports to the EU.
The financial services industry is crucial to the success of the UK economy. EU financial integration has helped UK financial firms grow both in size and in breadth of services they offer.
Many financial services firms from non-EEA countries, notably including the US and Switzerland, access the single market via subsidiaries located in an EU country, and in particular the UK.
This is possible because of the fundamental principle that all member states share a common regulatory ‘rule book’ for the financial sector. The subsidiaries of these non-EU firms need to comply with both EU rules and local requirements, including on the amount of capital they must hold.
Access to the EU single market has therefore been a significant factor in the UK becoming a major global financial centre, and host to Europe’s largest financial centre, as international firms see the UK as a gateway to accessing European markets.
Implications of leaving the EU
• Loss of ‘passporting’ rights. ‘Passporting’ rights allow firms with operations established in the UK to trade across the entire single market with lower costs and complexity. Financial firms are able to establish a European headquarters in one of the member states, such as the UK, and then offer services across the whole of the EU without requiring further authorisations. No FTAs have equivalent provisions on market access for financial services.
Experts such as Oxford Economics, HM Government, CBI, DLA Piper, and Allen and Overy, are clear that UK firms would lose access to the highly value ‘passporting’ regime, as has the French economy minister, Emmanuel Macron, who said that “Those who pretend that passporting will be preserved exactly following the same rules, without any contribution to the budget are making a big mistake. Because it’s completely wrong.”
His comments were echoed by Jonathan Hill, the UK’s EU Commissioner for financial services, who said that leaving the EU “could leave our financial services industry without its passport”. The Governor of the Bank of England and others have made clear that this would lead to relocation of activities elsewhere.
• Losing trade in Euros. The UK is currently the global and European centre for foreign currency exchange and Euro-denominated wholesale banking. Britain accounts for 45% of total global Euro trading. The European Central Bank is pushing for requirements for Euro clearing houses to be largely based in the Eurozone, which would impact the trade in the UK. But through its membership of the EU, the UK was successful in challenging the ECB’s efforts and retaining its status. Outside of the EU, PwC finds “it is likely that the UK would lose the right to challenge the ECB’s decisions on such matters”.