Britain’s chancellor threw a lifeline to the financial services sector last night (Sept. 13) in a speech that suggests that the industry could get special treatment after Brexit. It’s a big deal for the City, after all, dozens of banks and businesses have been vocal about how they are looking to relocate or expand operations in Europe and US, to counteract a “hard Brexit.”
In addition to the speech, Chancellor Philip Hammond said he would work on a “bespoke” deal with the EU for the City of London and that a transitional deal would be “integral” to ensure that Brexit happens smoothly.
How important is the financial sector to the UK economy?
A report by financial services industry lobby group TheCityUK earlier this year stipulated how important each individual working in the sector is to the economy. When using the gross value added measure, which is output minus consumption, staff in the industry contribute 1.5 times the average worker in Britain, with £79,500 ($105,056) (pdf). TheCityUK also put the sector’s contribution to the economy at £176 billion ($232.5 billion) in 2015, counting in all affiliated sectors, and related-employees to around 2.2 million, worth nearly 8% of all UK jobs.
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But, why should the sector get special treatment?
UK prime minister Theresa May has repeatedly said there is going to be a “hard Brexit.” This means Britain would leave the EU without access to the Single Market.
Access to this is a linchpin to providing services to EU citizens. London is the hub for processing of euro-denominated derivatives contracts by clearing houses. The clearing business is arguably the jewel in the crown (paywall) for the financial services sector as it clears 18 major currencies and is worth around €930 billion ($1.1 trillion) per day. Not being part of the bloc anymore makes EU leaders wonder if London should be stripped of this business.
On top of that, you have the issue of financial passporting, which allows UK-based firms to do business in other EU and European Economic Area nations. Since Britain is giving up its EU membership, it calls into question what happens about this financial passporting ability. This could affect 5,500 UK companies, worth a combined turnover of £9 billion ($11.89 billion), according to the Financial Conduct Authority.
Companies, banks, and countries have already expressed major concerns over the potential loss of these abilities and have publicly said they are moving or expanding operations elsewhere because of the uncertainty of what it would do to business.
Is it likely that a special deal will be made for the City or is this just posturing?
Chancellor Hammond has previously defied prime minister May’s approach to Brexit talks, but this speech pledged cooperation with her in getting the best deal possible for a sector that is one of the driving forces for the UK economy. The EU needs least disruption possible too, because they have “legitimate concerns… about the oversight and supervision of financial markets here in the UK that are providing vital financial services to EU firms and citizens,” said Hammond.
Also the logistics of moving business abroad is not easy, especially within the timeframe of Britain leaving the EU, which is Mar. 29, 2019. Xavier Rolet, chief executive of the London Stock Exchange, warned in a letter to The Times (paywall) that stripping London of the euro clearing business would lose efficiencies and could cost investors up to €100 billion ($118.9 billion) over five years. On top of that, banks or businesses looking to relocate staff and resources would cost millions. For example, it would cost HSBC $300,000 to move each bank job to Paris.
So, really it is in everyone’s interest that financial services at least gets a Brexit deal that doesn’t sever a lifeblood for Britain’s economy.