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Talks are still outstanding with the EU, Britain's single biggest export market for services. And London’s place as Europe’s banker — already challenged by quitting the EU's single market — is under threat from the slim provisions of its Brexit trade deal with Brussels.
"This is an ongoing question for financial services. It's going to last for 18 months or two years at least," John Liver, head of financial services regulation at consultancy firm EY said.
The European Commission’s determination to on-shore as much of its financial activity as possible has left some in the City of London fearful there will only be a bare minimum of cooperation in the sector. Yet, such is the breadth of London’s financial ecosystem, there are limits to how damaging the Commission’s strategy may prove.
Reducing the bloc’s reliance on financial services imports for its domestic market is regarded as “crucial for the EU’s global competitiveness and its autonomy,” the Commission says. It’s pursuing a capital markets union, aimed at cutting dependence on London and other financial hubs for funding its businesses. The pursuit of a CMU began long before Britain's referendum, though experts say Brexit has made it a greater priority.
Raising capital in the EU is, however, still a challenge. Companies have long grown used to getting money from national champion banks, taking loan-based finance rather than other forms of investment more readily available in financial centers like London. Bank-based finance often suits mid-sized or large companies with well-established balance sheets. It’s less geared to the risk associated with new startups, the kind of companies that adopt and attempt to scale new technologies, for instance.
“This is not a kind of communist regime where you just decide that Madrid will become the capital of seed capital for startups,” said Carsten Brzeski, chief economist for ING bank in Germany. “The eurozone economy is still extremely dependent on bank financing.”
That’s not to suggest that the Commission is somehow powerless in its pursuit of a CMU. There are “many screws” it can turn to increase capital risk appetites in a climate of low interest rates, Brzeski noted, but “you cannot just create such a universe overnight."
As economies become more digital, it's hard to get a clear picture of trade in services, something the U.K.'s Department for International Trade is trying to address. However, financial and professional services account for more than 7 percent of employment in the U.K. and £10 in every £100 of UK economic output, according to a CityUK analysis of official data.