It’s been over six years since the UK public voted on Brexit, and we’re now seeing some of the consequences of that decision. Despite the Referendum taking place in 2016, it took until the 31st of January 2020 before the UK officially left the European Union.
Nearly three years on, how has Brexit affected the financial markets of the UK?
Unfavourable Trade Agreements
One of the major pieces of legislation between the EU and the UK during the transitionary period was the TCA or the Trade and Corporation Agreement. This agreement essentially prevents unfair tax competition between the EU and the UK, as well as non-discrimination clauses which would prevent UK firms from being treated less favourably by other European nations.
However, this agreement was focused on trade and goods. It did not apply to the financial section, which means that it did not extend the financial firms’ rights to offer services on a pan-EU basis and meant that they would not benefit from automatic access to the EU single market. This meant they had to comply with the rules of each country where they wished to do business, making it harder to offer international services.
This would have come as no surprise to the industry, as it was a concern flagged during the Brexit campaign, as this loss would ruin the UK’s reputation as a central hub for financial services. The lack of European access from the UK has led to UK-based firms either ceasing their operations within the EU market, opening up separate European subsidiaries, or restructuring their European business entirely. All three options result in a loss of UK-based business, which is bad news for a country where services (particularly banking services) account for the largest proportion of its GDP by far.
We already see the impact, as UK exports of financial services to the EU have fallen substantially between 2018 and 2021, falling 19%, despite exports to non-EU countries rising 4%. At the start of 2022, the EU accounted for over 34% of the UK’s financial services exports, compared to the second highest, the USA, at 31%.
What Was The UK Hoping For?
It seems the UK was hoping for more favourable trading terms with its neighbours in the financial sector to emulate a country such as Canada, which has extremely strong agreements with its neighbours, the US and Mexico. The three nations have created the largest free trade region in the world, the Canada - United States - Mexico Agreement (CUSMA).
Within this agreement, Canada has similar access to the US and Mexico that the UK was looking for from the UK. That is, they have non-discrimination clauses that prevent Canadian institutions from being treated less favourably than internal institutions and unencumbered access to both markets.
In fact, this is something that Canada managed to agree with the European Union when it entered the EU - Canada comprehensive Economic and Trade Agreement (CETA). The financial services chapter of the agreement “enables financial institutions and investors in the EU and Canada to benefit from fair, equal access to each other's markets.” While certain conditions apply (such as the firms complying with EU regulatory standards), this represents something the UK would have been looking for when leaving the EU.
However, things can change quickly in the financial sector. Over the past two decades, the shift has firmly moved in the direction of Digital Banking, where the regulations aren’t as established. In fact, in the UK, a single regulatory framework for governing FinTech doesn’t exist!
What is FinTech?
FinTech is one of the fastest-scaling sectors of 2022, as companies are looking for faster and more efficient ways of moving money around, so we expect to see it take over an increasing amount of the financial services sector. We’ve already seen progress over the past twenty years, as one of the primary forms of monetary transfer, the cheque, has been replaced by much faster, more secure systems, such as e-wallets. Companies like Skrill and MuchBetter have created billion-dollar businesses based on their revolutionary e-wallet system and transformed the face of peer-to-peer and business-to-business transactions.
Many small and large businesses use companies like Skrill and MuchBetter, as there is no discrimination when it comes to the kind of services they offer. Some institutional banks and other companies, such as PayPal, will limit the accounts associated with online casinos or the gambling industry in general. This prevents these businesses from being able to operate on a day-to-day basis.
These problems have led these kinds of industries to utilize other forms of electronic payment, such as electronic cards. Thousands of businesses worldwide accept payment methods such as Paysafecard for their transactions, allowing them to reach a wider audience that may not have access to bank accounts.
This is the benefit FinTech brings to the financial services industry; they give more people the financial agency to spend money how they wish. Given it’s such a new industry and the lack of financial regulations that exist in the UK, it may be its way out of trouble in what is such an important industry for them. However, only time will tell whether they can make the most of this opportunity and rescue the financial services sector.