London has long been considered Europe’s leading financial hub with many European Countries having relied on its financial services expertise over the years, and carrying out a majority of their economic activities either directly or indirectly out of London. The UK relies heavily on London’s financial sector – contributing 12% of the UK’s total GDP, and making it hugely influential on its home turf.
How could this be affected?
Now that the UK has officially left the EU, this is all set to potentially be impacted. The UK formally ended its membership on the 31st December 2020, without a comprehensive agreement for the financial services – leaving it exposed and vulnerable. The renowned UK/EU trade deal was hailed as a success by both sides for the trade of goods; however, it offered very little to secure London’s financial reputation. Many have said that Britain purposely chose to keep the financial sector out of talks with Brussels, hoping this would spur negotiations to forge a deal in the coming months. Ultimately, this has left the UK’s financial sector limited access to the EU market.
The main disruptions to the current operations were the exclusion of ‘Passporting rights’ in the agreement. ‘Passporting’ is the process whereby any British-based financial institution – be it banks, insurance providers, or asset management firms, can sell their products and/or services to the EU without the need to obtain a license, get regulatory approval, or set up any local subsidiaries—ultimately allowing the financial services to sell their services freely within the EU. It has been estimated that nearly 5,500 firms in the UK rely on passporting in order to conduct business with the rest of the EU.
However, from the 1st January 2021, this was replaced with partial ‘equivalence’. This meant that London financial services providers can still carry out their services, but only where the EU has agreed that the relevant financial regulations (both laws and supervisory frameworks) match EU Standards.
What’s happening now?
Since leaving the EU at the beginning of this year, the UK has been awaiting clearance from the EU to allow them to start trading in a similar manner as they were before. João Vale de Almedia, the European Union’s Ambassador to the UK, has claimed that Brussels is still waiting for more information from the UK before deciding whether British financial services regulations should be deemed ‘equivalent’ to the EU state’s rules, to then be allowed to trade.
As the UK has only just left the EU at the beginning of this month, it would generally be assumed that they were already operating at EU standards. Therefore, it would be sufficient to serve EU customers. Because officials are now withholding these allowances, this has caused grumblings from UK based finance firms that the EU firms are purposely doing this to make London seem vulnerable to large financial firms, in the hope of pressuring them to move headquarters to European financial centres.
Jonah Hill, a former EU financial services commissioner, has said that it would not be in Brussel’s best interests to allow London to continue dominating the European financial markets in the way it did before Brexit, after all the EU would surely want its leading financial supplier to be based within the single market, something of which the UK is no longer.
What could this mean?
This could mean the end of London’s reign as the financial hub for continental Europe and see the rise of a new centre.
Who is a potential contender?
The UK’s closest neighbour has high potential as a financial hub. It has the same native-speaking environment as the UK, which offers international business convenience. On top of this, their business environment already has access to over 400m European consumers and is favoured by FinTech companies. It has a favourably low corporate tax rate, strong academic reputation, and affordable living costs. Irish officials have reported that since late 2016 they have received enquiries from over 100 London-based financial groups that are considering opening up an office in Dublin, with the likes of Barclays Bank and the Bank of America already choosing Dublin as their new European Headquarters.
Home to the world’s oldest stock exchange, attracting both those who are interested in finance and trade. The population’s fantastic English-speaking skills also serve as an added advantage over other European challengers.
Considered as one of the front runners for the race because of its low tax rate, high GDP per capita, multi-linguistic population, and central location; at the centre of Western Europe. Luxembourg already has a strong banking industry and is a centre for investment funds for Europe, with strong political ties to all its neighbouring nations.
Paris has always been known for stable and prosperous banks and holds the largest asset management firm in Europe, and is considered an understandable choice for many.
Home to many German giants, the financial capital of the Eurozone, and the hosting headquarters of the European Central Bank, Frankfurt is on its way to becoming a global financial centre already.
However, some experts say the solution to the financial hub problem could be handled ‘the European way’ with financial centres in various locations.
What to expect next
For now, both the EU and UK have agreed on March 2021 as a deadline to agree upon a Memorandum of Understanding, establishing the framework for their cooperation with each other moving forward, giving them both time to decide to recognise each other’s rules through ‘equivalence’ or find alternative arrangements to current operations. This deadline results from a ‘Joint Declaration On Financial Services Regulatory Cooperation Between The European Union And The United Kingdom’ which states;
- The Union and the United Kingdom agree to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions. Based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers, these arrangements will allow for:
- bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
- transparency and appropriate dialogue in the process of adoption, suspension, and withdrawal
- of equivalence decisions; and enhanced cooperation and coordination including in international bodies as appropriate.
- Both Parties will, by March 2021, agree to a Memorandum of Understanding establishing the framework for this cooperation. The Parties will discuss, inter alia, how to move forward on both sides with equivalence determinations between the Union and the United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side.
How can Animo help?
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