A trio of reports from politicians and business leaders warned of the risks to the UK’s financial services and of the likelihood of relocations abroad if there is a “disorderly Brexit” with no effective transitional deal.

Threat to the UK’s financial centre status

As the remaining 27 EU members met in Brussels to establish chief negotiator Michel Barnier’s brief for upcoming transition talks, the latest Financial Services Survey from the Confederation of British Industry (CBI) and PwC found that nine out of ten firms regarded Brexit as the most serious threat to UK’s status as a financial centre.Simultaneously, a report from the House of Lords’ EU Financial Affairs sub-committee warned that some financial clearing activity currently based in London could be required to relocate to elsewhere in Europe because of “political rather than purely economic calculations emerging in the broader Brexit negotiations”.And TheCityUK lobby group said that unless there was clarity on the terms of a transition deal in the next few months, “business will have to assume a disorderly Brexit and accelerate contingency plans (to relocate) to protect their customers and clients”. 

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Financial sector Brexit outlook

The CBI/PwC survey of 92 firms found that optimism about the overall business situation in the financial services sector had fallen significantly in the last quarter. However, while banks, building societies and general insurers were decidedly less positive than three months earlier, finance houses, life insurers and investment managers felt more optimistic. Rain Newton-Smith, CBI chief economist, said, “With overall business levels seen as broadly typical, and demand and profitability continuing to expand, the financial services sector ended last year on a stable footing. Scratch the surface, however, and a different story is revealed.“Optimism in parts of the sector has been falling for the last two years, whilst firms are nearly unanimous in voicing their concern about the damaging impact of Brexit uncertainty and the need for the UK to remain a vibrant centre of FinTech and innovation.“To restore some confidence, financial services firms absolutely must get as much certainty as possible on what the UK is aiming for in the Brexit negotiations, the opportunities of success and the consequences of failure.”

Transitional period increasingly important

Andrew Kail, head of financial services at PwC, added, “The UK is set to leave the EU exactly 14 months from today. A transition period is likely, but ultimately the financial services sector – a critical part of the economy – must prepare itself to operate without membership of this key trading market.“The industry will need to take positive action if it is to preserve its trading status and business model. There is much activity in boardrooms despite the question mark over trade negotiation outcomes. In the coming months we can expect to see more detail on companies’ updated contingency planning.”In their report, the House of Lords’ committee said both sides in the Brexit talks should favour continued, mutual market access as “open and globalised capital markets are in the interests of both the UK and the EU”.

Risks associated with Brexit for UK businesses

Baroness Falkner of Margravine, who chairs the committee, said, “There is a risk of market fragmentation and financial instability if the UK loses access to the EU, as well as harm to customers and businesses.“The UK’s financial services sector is a global asset and both sides should want it to continue serving clients throughout Europe.”Miles Celic, chief executive officer of TheCityUK, said the outcome of Monday’s meeting in Brussels would be “critical” as it would give Mr Barnier his instructions for negotiating the transition deal that businesses have been waiting for.“There is little time left,” Mr Celic said. “If we can’t get clarity on transition early this year, business will have to assume a disorderly Brexit and accelerate contingency plans to protect their customers and clients.“Our industry has been very clear on what it wants and how the best outcome could be achieved. We are yet to hear from the EU on what its objectives are and how they will ultimately benefit the European economy, European business and the financial costs facing ordinary consumers across the continent.”

EU trade deal that works for the UK

A government spokesman in London said, “We are engaging extensively with businesses and organisations across the country as we seek to secure a good deal with the EU that works for the whole of the UK.“We recognise the importance of providing certainty for businesses, which is why we want to reach agreement with the EU on an implementation period as soon as possible.“We have already made good progress, agreeing in December to move talks onto our future relationship. The EU has said they will offer their most ambitious free trade approach and we are confident of negotiating a deep and special economic partnership.”

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Read more about the future of UK business in the Winter issue of our magazine 

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