Two years on from Brexit and with little progress having been made in the negotiations between the UK and the EU, the prospect of no deal being agreed for the City of London looms larger.
New analysis demonstrates the scale of the problem facing a sector which, like both car and plane manufacturing, is hugely important to the UK economy but risks being badly damaged if Theresa May’s team cannot hammer out post-Brexit arrangements quickly.
On Sunday, Jeremy Hunt attacked firms such as Airbus for “completely inappropriate threats” to leave the UK. But when it comes to the country’s £119bn financial services industry the numbers, appropriately, do the talking.
Of 222 large banks, insurers, asset managers and other financial services companies tracked by Ernst and Young (EY), more than a third have said they are considering or have confirmed they are moving operations and/or staff from the UK to the EU.
Bankers don’t tend to receive a great deal of sympathy in the UK, a nation where the average worker’s inflation-adjusted wages still have yet to recover to where they were before the financial crisis more than a decade ago.
But, according to figures from the Commons library, financial services directly employ 1.1 million people in this country. The vast majority of those are far from being the champagne-quaffing hedge fund fat cats of popular myth.
The effects of a bad settlemnt for financial services would be felt across the country, with two-thirds of the sector’s workers based outside London. Twenty-one towns and cities are home to at least 10,000 people who are employed in the sector, according to figures from industry lobby group, TheCityUK.
The firms tracked by EY have so far said around 10,000 jobs will move to the UK. While that’s only a small fraction of the total number employed, the range of estimates put the likely final figure far higher.
Rather than a mass exodus on Brexit day, the true impact of a less-than-favourable settlement is likely to be more of a slow motion decline, as Goldman Sachs boss Lloyd Blankfein alluded to recently.
While the Wall Street investment banking titan is going ahead with opening its new £300m London base, the decision to build it in the first place might have been made differently had it been made after the referendum result, he said.
“Therefore, there are decisions made today, and people who are building buildings [in the UK] four years from now won’t be.”
The number of financial services businesses confirming moves is rising steadily. Thirty-two have now announced firm numbers of jobs that will move away from the UK, up from 28 last quarter.
The public purse also stands to lose out. Financial services contributed £27.3bn to the Exchequer last year. Consumers too will be directly affected. Thirty-six million insurance policyholders across the UK and European Economic Area (EEA) could face disruption to their coverage unless problems around how cross-border contracts are treated are ironed out.
But, while City firms have justifiably called for more decisive government action, they have themselves been criticised for being dangerously unprepared for the potential regulatory cliff edge they face.
Europe’s banking watchdog on Monday warned financial services firms not to expect a “miracle” public intervention to save them.
UK branches of banks from the EU need to apply to the European Banking Authority (EBA) for permission to continue serving customers. The EBA said banks must have enough staff to manage risks from the day of withdrawal on 29 March next year but many have yet to demonstrate they will.
“This should be a wakeup call. Time is running out, in some cases it has run out, and don’t assume there will be a transition period,” said Piers Haben, the EBA’s director of banking markets, innovation and consumers.
The UK and EU have provisionally agreed a transition deal to run from March next year to the end of 2020 under which the country will be subject to Brussels’ rules with no power to influence them. But it is part of wider negotiations, with agreement meant to be reached on the whole package.
“There is widespread perception there will be a public policy miracle,” Mr Haben said. “I don’t think banks can rely on a general, catch-all public intervention.”
Omar Ali, UK financial services leader at EY, is marginally more sanguine but still thinks progress on a deal is needed soon to avoid further damage to the industry.
“The transition period, when confirmed, means that we avoid the much-feared ‘cliff edge’, but the level of change to how financial services firms operate will still be significant and the time window to meet these challenges is short,” he says.
“Until there is more certainty around key issues, such as the degree of access, movement of people and cross-border contract continuity we should continue to expect companies to make operational moves, and prudently stick to their original contingency plans.”
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