Following the UK’s referendum vote to Leave the EU, a number of discussions have taken place between the UK government and the European Commission to agree on the terms of a new relationship. On 24 December 2020, the EU and UK negotiators agreed on a deal. However, this trading agreement does not include any new rules governing the financial services sector. As a result, a large number of UK businesses and fintech firms are uncertain about how to trade within the EU.
London is one of the most attractive places in the world to do business and has a dynamic, deep and wide financial services sector. The financial services sector represents 7 percent of the UK economy and contributed to more than 10 percent of UK tax revenues. Furthermore, nearly half of European fintech companies valued at over $1 billion are based in the UK. A strong regulatory environment, talented people, and convenient geographic location are some of the factors that have contributed to making the City of London an attractive place to conduct financial services.
What will happen to jobs?
Since 23 June 2016, when the UK voted to leave the single market, more than 10,000 financial services jobs have left London for cities such as Frankfurt and Paris. It is estimated that an additional 75,000 more jobs will leave London as large banks relocate their European headquarters. This will significantly drain London’s talent pool to the benefit of that of other European cities. This will also impact the fintech sector because it also depends on this vibrant talent pool for hiring and capital issuance. UK financial services firms make themselves attractive enough to retain the talent pool in the London.
What about serving clients and customers?
The big loss for UK (and EU) financial services firms is passporting services. Under the new agreement, UK financial services firms will no longer be able to establish a presence in the EU based on authorization granted by UK authorities. UK businesses no longer have the right to approach EU clients directly. However, EU clients can solicit the services of UK firms. This new regime will inevitably increase compliance costs for UK firms that intend to serve customers within the EU.
There is also a big question mark around the EU’s reliance on London clearinghouses. The majority of European-denominated derivatives trades were previously cleared in London. The UK obviously would want to keep this business in London whilst the EU’s goal is to bring euro-denominated derivatives trading within its borders. As it stands, the European Union has granted the UK the permission to keep Euro-denominated clearing in the UK until June 2022. What will happen afterwards is still to be determined.
Discussions between the UK and the EU are ongoing and could take up to 2 years to resolve. In the meantime, some EU countries such as Lithuania and Bulgaria are positioning themselves to be attractive to UK financial services firms. They are offering to welcome UK firms with open arms by providing a stable regulatory framework that offers UK fintech firms an entry point into the EU.
Maintaining business relationships with the EU
Besides all the uncertainty surrounding UK firms doing business in the EU, there is one thing that remains constant – businesses will still be able send money to EU at low costs. If, because of your business dealings, you need to send money to Italy, Poland or Romania, you need not to worry because Tamsey enables you to do just that, at ultra-low costs. All you need to do is download the mobile application and from your phone you will have the power to make fast, secure and cheap transfers to the EU.
The Bright side
Besides all the Brexit uncertainty and difficult times presented by COVID-19, what EU and UK firms have learnt in 2020 during the pandemic and lockdown is to develop a hybrid method of working. Fintech companies have developed innovative ways of working that are not bound by geographic borders. Businesses are a lot more open to opportunities across Europe because the lockdown has made businesses more resilient than they were before the COVID-19 pandemic.
In conclusion, financial services businesses should not be distracted by the uncertainty. London will remain an attractive place to do business because of the strong regulatory environment, and the convenient geographic location that the city offers. Some of the best law firms are still based in London and will not be moving. Additionally, the global pandemic triggered by the COVID-19 virus has created a new world in which being agile and flexible is key. London-based financial services firms should not be intimidated by the higher compliance constraints that may prevail post-Brexit but should rather embrace the opportunity that technology has offered to serve customers, not just in the EU but across the globe. Brexit offers the opportunity for UK financial services firms to turn the US and Asian market, which offers attractive opportunities. The time is now. Act.