Brexit uncertainty and its impact on financial services – what next?

Financial markets resent political uncertainty. In today’s turbulent political landscape, the associated risks represent some of the most important considerations for international investors. The enduring Brexit blockade has plagued the City of London and foreign financial services markets with uncertainty. It is a perfect example of extensive political flux and instability having profound impacts upon the economic domain. With ongoing confusion clouding the Brexit process in the House of Commons as Theresa May struggles on with her “deal or no-deal” strategy, how is all this affecting the financial services industry?

The short answer is self-evident. Alarm bells are ringing, and the ongoing Brexit impasse is the culprit. This week, the CBI and PwC released a survey of 84 businesses revealing that the net level of optimism to pessimism had fallen to -43% percent, meaning that sector sentiment is now the lowest it has been since 2008. Along with year-on-year decreases in business volumes since the Brexit referendum, as a general trend, UK growth has stagnated since the Brexit vote. In February, Gertjan Vlieghe, part of the Bank of England’s monetary policy committee, stated that the Brexit process had lost the UK £40 billion per year in terms of GDP growth, which equates to around £800 million pounds a week. This is particularly concerning when set against strong growth outlooks from the rest of the globe compared to the past decade. The UK financial services sector is responsible for a large proportion of the country’s growth, producing over 7% of total annual national output (double the equivalent share within the French and German economies, both at 3.5%), and providing employment to more than 1 million people across the UK. The EU remains the UK’s closest partner in financial services, with 44% of British exports in the sector going to the continent. Rain Newton-Smith, the CBI’s chief economist, stated that “Brexit is now a national emergency. It is in absolutely nobody’s interest for the uncertainty to drag on, and continually chip away at our economy and financial services sector.”

The ongoing risk of a no-deal Brexit would have particularly strong effects on the financial services sector too, according to data from the International Monetary Fund. That analysis indicated that Britain crashing out of the EU could cost the finance industry a reduction of a quarter in economic output. Such a perception has prompted many major banks to relocate business to the European Union to avoid ongoing Brexit uncertainty and disruption, with data from the capital markets thinktank New Financial suggesting that finance firms have already carried out extensive Brexit contingency efforts, moving nearly £900 billion in funds and assets out of the UK. This week, JPMorgan Chase announced it had provided new EU employment contracts to hundreds of its London staff ready in case no-deal happens, while Royal Bank of Scotland has already begun operations at its new entity in Holland. Despite this, the Bank of England says that the UK’s finance sector is ready to cope with the worst possible consequences of a disorderly no-deal Brexit, describing the sector as “strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit.” The bank’s governor, Mark Carney, explained this in terms of a safer banking sector overall that now holds sufficient liquid assets (up to £1 trillion) to deal with lending even in a no-deal context.

At time of writing, the House of Commons is caught between a strong majority against May’s Brexit deal and a lack of majority for any alternative. MPs rejected all alternative Brexit directions last week in a series of indicative votes. MPs will vote on an array of potential Brexit options to try to find a majority for a way forward. Eight options have been tabled for voting today, including a no-deal Brexit, a second referendum and a customs union. May’s deal was voted down a third time on Friday, but reports suggest she may seek its approval a fourth time this week to try to avoid no-deal occurring by default on April 12, despite repeated objections from the Speaker John Bercow to making MPs vote on the same deal recurrently. A Brussels source from the Financial Times suggested that EU officials were dubious of the alternative plans being discussed in Parliament, because MPs fail to appreciate the straight choice they have (if they want to avoid no-deal) between accepting May’s Brexit deal and a long extension to Article 50, remaining in the European Union for much longer. Not only that, it seems clear in Brussels circles that any alternative to May’s deal would involve the UK being obliged to participate in European Parliament elections from May 23-26. In any case, in reaction to MPs voting down the deal yet again, European Council President Tusk announced an emergency summit for April 10, two days before the new Brexit deadline.

Brexit is not a done deal, and far from it. We may have more clarity on what the circumstances will be in the coming days. But we have thought that before and been wrong several times. If one thing is obvious – it is that business is craving Brexit certainty – a concept that thus far has not come to fruition.

John Bethell