By Steve Taklalsingh, MD UK Business, Amaiz
It has been a gloomy summer, and I’m not just talking about the lack of sun and the ongoing global pandemic. At the end of last year Amaiz published a report: “The Brexit Brink: Are British SMEs about to fall off the edge of Europe – or building new bridges?” This summarised some of the key concerns for our sector. I was disappointed, at the time, that the key issues for financial services had been ignored in the Brexit agreement, but I was optimistic that things would be resolved in the first half of the year. The ‘summer’ has been and gone and things are worse, not better. What are the issues? What can we now expect? What can the financial services sector do about them?
The issue that has been on the minds of almost everyone in financial services is the fact that EU equivalence, by which British banks, payment and electronic money institutions, insurance companies and investment firms can operate in the EU, has still not been agreed and, worse still, the Government now appear to have dropped this from their plans. This despite the fact that EU companies are allowed to operate in the UK, making it a very distorted marketplace.
The main regulatory changes affecting financial services, post Brexit, are:
- Financial reporting requirements have changed for many UK businesses. Companies that adopted the EU-endorsed International Financial Reporting Standards (IFRS) now have to use UK-adopted international accounting standards (IAS) instead of EU-adopted IAS.
- Auditing standards have changed for smaller companies.
- Some professional qualifications won’t be recognised in the EU.
- EU citizens moving to the UK to work need a visa which requires them to show they have a job offer from an approved employer sponsor.
- Insurance requirements and arrangements for companies whose employees have to travel in Europe for business purposes have changed.
In February the Government created the Taskforce for Innovation Growth and Regulatory Reform (TIGRR). This was tasked with scoping out and proposing options for ‘how the UK can take advantage of our new-found regulatory freedom’. Their report made it clear that the Government view financial services as separate from the ‘real economy’ and focusses on how to make the city more competitive in the absence EU equivalence.
It is now clear that the Government has chosen domestic regulatory autonomy over access to the EU. In July, when the Chancellor spoke at the Mansion House. His speech and an accompanying paper “A new chapter for financial services” set out the Government’s vision for the financial services sector which focussed on reforming financial services regulation to help companies innovate with new technology and products. The idea is that the UK will take first adopter advantage, facilitated by their new regulatory regime.
Financial services contribute 12% to the UK’s GDP. Our vibrant start up FinTech scene has been the envy of the world. Internationally, having a foothold in this market, and a London address, was the aspiration of financial services companies who wanted to be taken seriously, but not anymore. In 2019 40% of UK financial services exports were to the EU, so the Government is taking a very high risk strategy that puts both the sector and the UK economy at risk. The extent to which UK companies can offset this export market loss by increasing trade with countries outside the EU will be critical.
Most financial services companies have reviewed their business model in response to Brexit. Many have chosen to focus attention on the Far East, South Asia, South America and Africa. However, these markets will take time to build and they’re currently a long way from replacing the EU. UK financial exports to Australia and Switzerland, for example, the two countries that the UK has targeted for post-Brexit trade opportunities, was less than 10% of that to the EU in 2020.
Many of the larger companies, who want to continue to access the EU, are now establishing a base there. However, despite the Government’s ambitions, this is not an option for many of the smaller, more innovative companies. It can cost millions to duplicate regulatory and technology infrastructures.
Brexit has not quite lived up to the gloomiest predictions of the remainers prior to Brexit. It seems likely that London will remain Europe’s largest financial centre, following the temporary loss of that status in January to Amsterdam. UK FinTech is renowned for being innovative and leading edge. However, to make up a 40% loss in exports we will certainly need to be over the coming years.
