What does a Brexit deal mean for financial services?

London’s financial markets prospered over the last four decades as the UK’s capital became the European Union’s major center for lending, trade and investment.

Now outside the European Union, the future size and impact of the city’s finance industry is in question. The financial services sector has the largest trade surplus of any industry in the UK, with exports worth £ 79 billion in 2019, equivalent to $ 106 billion.

1. Does the deal include financial services?

The deal ensures that tariff-free trade for goods will continue and informs how the two economies will negotiate issues ranging from security cooperation to fishing rights, but it is not entirely clear whether it will allow financial services How it will affect.

The two sides agreed during the talks to discuss financial services separately. The UK government said in a document published on Thursday that the agreement included provisions to support trade in services, including financial services and legal services.

“It will provide many UK service suppliers with a legal guarantee that they will not face barriers to trade and will support the mobility of UK professionals who will continue to do business across the EU,” according to the document.

The agreement described the UK government as “groundbreaking provisions” on legal services that allow UK lawyers to advise clients on UK and public international law, except where EU members are specific on this Have boundaries.

From 1 January, UK-based financial institutions lose automatic access to the EU single market. To serve customers in the European Union next year, UK-based institutions will have to provide equivalent rights under which the EU allows them to conduct other financial activities. Equivalence rights can be withdrawn on short notice. So far, the European Union has granted temporary equivalence rights to British clearing warehouses, which trade between buyers and sellers, and vow to complete the deal even if one side reneges. London has the majority of this financial pipeline, which manages billions of dollars of derivatives contracts every day.

The parties will continue to discuss how to proceed on providing parity and have pledged to codify a framework for regulatory cooperation.

2. How will the deal affect the finance industry?

The agreement will improve relations between politicians and regulators on both sides. This is likely to be the result for UK-based financial firms that want to give more equivalence decisions to the EU allowing them to reach the single market. On 9 December, the International Swaps and Derivatives Association wrote to the European Union urging them to provide equivalence for the UK derivatives trading venue. The letter was sent after EU regulators announced the rules on 25 November. After the completion of Brexit, London-based derivatives traders in EU banks will be prevented from continuing trade.

3. How has Brexit affected UK financial services so far?

EU regulators want some of the trade currently happening in the European Union to be conducted in London. According to accounting firm Ernst & Young, banks and fund managers have transferred £ 1.2 trillion of assets from the UK to the European Union after the 2016 Brexit vote and more than 7,500 jobs have left the country in the same period. Since the referendum, 44 firms have announced plans to hire local to 2,850 existing or newly created roles in the European Union, according to Ernst & Young. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets exiting London.

4. What are people saying?

Following the announcement of the agreement on Thursday, The Association for Financial Markets in Europe said in a statement that it was important that the EU and the UK now immediately implement outstanding equivalence decisions to reduce disruption at the end of the transition period .

Bob Wiggle, UK Finance’s chair, trade association for financial services firms, said more work was yet to be done.

“It will be important to build on the foundation of this business deal by strengthening the system of future trading in financial services,” he said in a statement. “This can be achieved by building on long-term regulatory negotiations and supervisory cooperation between UK and EU officials and reaching agreements on all appropriate equivalent determinations as soon as possible.”

The free-trade agreement is positive news, said Catherine McGinnas, policy chairman of the City of London, the council that manages London’s financial district.

“We hope that this can lay the foundation for a future partnership,” Ms. McGinnens said in a statement. “We request both sides to continue working on other outstanding issues, including agreeing on a framework for regulatory and supervisory cooperation.

Nicholas Machel, CEO of Luxembourg for Finance, the development agency for the country’s financial services industry, said: “We should now look at some of the necessary goodwill to discuss financial services.” It has never been in anyone’s interest to make access to capital more difficult in the context of an epidemic crisis.

The Bank of England said earlier this month that Brexit had “mitigated” most of the risk to the UK’s financial stability, but there could still be some market volatility and disruption for financial services.

5. What happens next?

Politicians, regulators and bankers on both sides of the English Channel will try to shape the European financial markets for years to come.

From the UK point of view there are two possible avenues ahead: attempting to be fully aligned with EU rules to do more trade with the bloc, or striking on a more independent path and winning more trade To change the rules in a dialect. Globally. Many large institutions would like to see more alignment, while Brexit supporters favor deviations.

EU officials are watching the UK closely for signs that their former partner will be too much of a competitor. France’s financial regulator chairman Robert Ophel cited statements from Bank of England Governor Andrew Bailey and head of the UK Treasury Sage craze in this month as evidence the UK could enact regulation to compete with the EU.

“Ofele said in a speech on 2 December,” In this competitive context, we need to build a strong European market and respond rapidly to the development of financial markets.

Britain still has a lot to lose and the EU to gain. More than 90% of interest-rate derivatives of the euro-denomination and 84% of foreign exchange trading in the European Union occur in the UK, according to New Financial.

Write Simone Clarke at [email protected]