However, it is not just a UK concern. While UK based firms certainly benefit from having access to the European single market, by the same token, European businesses, public bodies and private citizens benefit from having access to the UK financial services industry and, via the UK, to the global financial system.
While inside EU, the UK has emerged as a major European financial centre, in part through the mutual regulatory recognition that EU membership affords.
Under this regime, in 2015, the rest of the EU imported c. €31bn worth of financial services from the UK. This trade flow is a compelling measure of Europe’s current reliance on the financial services production and distribution capacity that exists in the UK. That capacity consists of UK financial institutions; UK branches and subsidiaries of other EU and non-EU financial institutions; a wide array of related professional services firms (legal, accounting consulting etc.) that form a critical part of the supply chain; a deep pool of skilled employees; a large stock of physical and intellectual property; and the supervisory capacity to match all of that.
Brexit threatens to cut Europe off from this capacity and force an abrupt rebalancing and - with that – fragmentation of financial services production and distribution capacity from the UK to elsewhere in the EU. As such, it poses significant threats to the stability and efficiency of the European financial system and, by extension, to the European economy and financial wellbeing of Europe’s citizens.
This comes at a time when the European (including UK) economy is struggling to grow, and the European (including UK) financial services industry is struggling to break even.
This has profound implications for the forthcoming exit and revised trade negotiations. It implies that all sides need to start from a clear recognition of their mutual interests in minimising the disruption to Europeans’ ability to raise finance, invest savings, manage risk and settle trade. It implies that the final deal should as far as possible preserve and indeed enhance the efficiency, productivity and global access that the status quo provides.
Various organisations are responding to the need for clear recognition of mutual interests. Building on our pre-referendum work on the risks to the UK economy, we are adding to this effort by studying the potential economic cost to Europe and its citizens of forcing or allowing the European financial services industry to fragment as a consequence of Brexit. We are doing this as a global professional services network, unaligned with any particular national interest or trade body, but with the definite aim of helping to further the mutual interests of all parties.
The following short paper is a ‘curtain-raiser’ on our study and we will publish our fuller findings in due course.