British financial industry

In 2018, the British financial industry was the source of over a third of all the tax revenues, either directly through taxes paid by companies or indirectly through the PAYE of employees working in finance. When the UK was part of the Single Market in Financial Services, London was the major financial centre in Europe. A lot of the financial transactions executed in London had no British counterparty. British based banks and other financial institutions were closely connected with the rest of the Single Market.  That connection was weakened post-Brexit. Financial Regulations (which the United Kingdom contributed to define) meant that the United Kingdom was a “Third Country” like the United States, Japan, Switzerland, Singapore, etc.  During the implementation period, there were many talks of ‘enhanced equivalence’ or other arrangements that would have somehow allowed British Banks to access the European market in a not dissimilar way to what they used to do. After all, on January 1st 2021, the regulations were the same, weren’t they? It did not work that way simply because one of the largest financial markets in the world could not function under rules dictated by a foreign body. And yet, the sky has not fallen on the British financial industry.

Modern banking is very technology-driven, very dynamic and could potentially move anywhere with decent infrastructure very quickly. Banks using London as their base for the Single Market went to different European financial centres; some set up their new EU subsidiary in Frankfurt, others in Amsterdam, others in Paris, and some in Dublin. London still has kept the “skill cluster”, but this is not the only reason why it would be premature to write about a decline of the British Financial Industry.

We shall not see the bonfire of regulations that many predicted post-Brexit. Most of the current financial regulations result from international commitments signed at meetings where the UK participated in its name even when it was a member of the EU (e.g. G20); getting rid of others would create even more problems for cross-border relationships. The market will adjust to make the most of whatever competitive advantage London has.

Historically, London has been a major financial centre long before the Single Market in Financial Services existed. Non-British banks had subsidiaries in London when specific contracts or transactions were more difficult to negotiate in their home countries; for many banks, a representative office in London meant that their door was open to international financial transactions.  Times have changed, but the resilience of financial institutions has also changed. It is a profit-driven environment that is not afraid to find new ways to work and make money. The creativity that has led to new financial products and a new way of doing business will also lead the transition to its future role. London has been the home of banking and insurance for centuries, and it will find a way to stay open for business.

 

 

Silvano Stagni

Silvano Stagni, contributor at Parliament Magazine and managing director of Perpetual Motion Consulting and Research, asks whether we have the data to navigate the changes to the relationship between making the investment decision and executing it.