British banks brace for Brexit amidst tense trade deal negotiations

With UK-EU trade negotiations about to commence, the banking sector is expectant of a commercially viable economic landscape post-Brexit.

With Brexit now receding in the rear-view mirror, British politicians are rejoicing over a job well done, despite the litany of hiccups over the past 4 years.

However, with actual Brexit negotiations still ongoing and a fully-fledged trade deal still in the works, there may well be a few surprises for all market participants in the coming months.

Banks, in particular, are likely to feel the repercussions of extended negotiations and quite possibly, future roadblocks that stifle economic activity in the Eurozone and the UK.

Britain’s banking sector is a significant contributor to the UK economy, contributing around £130 billion to the economy and posting 7% of total economic output. For government officials, banks also contribute around £30 billion to government coffers each year which makes the banking industry a de-facto golden goose for the UK economy.

According to the UK government’s Brexit White Paper in February 2017, the reach of the sector beyond the City is extensive with the authors declaring that finance is not just a London-based sector. Two-thirds of financial professional services jobs are based outside the capital, including 156,700 in Scotland, 54,300 in Wales and 32,000 in Northern Ireland.

The paper also declares the UK to be a “global leader in a range of activities, including complex insurance, wholesale markets and investment banking, the provision of market infrastructure, asset management and fintech”.

Banking blues

Given the high stakes for societal economic prosperity and individual opportunity, Brexit is a prime market theme for most banks, in the UK, in Europe and across the globe.

That’s because UK banks are desperate to maintain access to EU customers despite Brexit. According to Reuters, banks are joining forces to lobby trade deal negotiators for as much as market access as possible without making Brexit seem like a reversal into Bremain.

According to reports, banks plan to argue that an existing section of the EU Securities Rules MiFID, known as Article 46, allows a degree of access – although to a far lower degree than what they expected back in 2016.

International banks want to provide services and advice to EU customers with many setting up new hubs within the EU in anticipation of Brexit.

However, what banks want is not necessarily what banks will get.

Brussels rejected the UK’s proposal in 2017 for broad, two-way trade after Brexit, saying Britain could not keep the benefits of the EU single market without obligations like free movement of people.

In other words, any new trade pact will need to be reciprocal and even-handed so banks may not be able to get the unfettered access they’re hoping for (unless the UK government softens its stance and accepts a common market as an example).

It would seem British policymakers and British banks have found themselves on opposing sides of the Brexit divide and working towards opposite goals with government officials pushing for a harder stance while banks prefer a softer alternative with more harmonisation.

From referendum to reality

The result of the UK referendum has created ample uncertainty for banks and financial services companies across the board.

Speculation has been rife relating to potential implications for the financial services sector including what Brexit implies for the EU economy.

Other questions include what will happen to passporting for UK firms with EU operations, what will happen to EU firms with operations in the UK, and possibly most importantly, what aspects of EU financial regulation will the UK retain (and on what terms) after trade deal negotiations are completed by the end of the year.

Passporting refers to the regulation of financial services, allowing UK firms to continue to do business throughout the EU without the need for further authorisation.

In immediate terms, Brexit is sealed but not yet delivered.

British policymakers and their European counterparts have reiterated that its “business as usual” regarding regulatory and legal frameworks governing banks and most other cornerstone industries to ensure economic continuity and avoid chaotic consequences resulting from people scrambling to mitigate future risks.

Currently, the UK has entered what’s known as an “implementation period” until December 2020 which will be used to negotiate the UK’s future relationship with the EU.

Before year-end, EU law will still apply in the UK, passporting will continue, as will safeguards for consumer rights and protections first derived from EU law.

Very importantly for Brits, any new EU legislation ratified before December 2020 will continue to apply in the UK after 31 December 2020 until (or if) the UK government makes changes to those laws.

Potential UK impact

Before the UK election late last year, investors were fearful that a no-deal Brexit would lead to a squeeze in business investment and hiring, and a renewed focus on cash and cost control among corporates.

Uncertainty was driving risk appetite lower and squeezing business investment to the point of companies fashioning crisis plans and focusing on emergency measures such as relocation.

Also, elevated uncertainty was weighing on merger and acquisition and IPO activity as well as inward investment.

With the Brexit debacle now coming to an end, investor risk appetite has recovered alongside the value of the pound against the Euro. Market participants have obtained some relief and rest bite but there is a strong chance pessimism can return just as quickly as it dissipated.

If the EU and the UK fail to agree on a trade deal, the UK could still potentially exit the EU under World Trade Organisation (WTO) terms which would impair existing import/export business and most likely reduce the value of trade between the UK and mainland Europe. For Europeans, Brexit will bring varied effects depending on the nation.

Analysis by Standard & Poor’s suggests the countries most affected by Brexit will be Ireland, Cyprus, the Netherlands, Norway and Switzerland while countries with the least exposure to the UK (Austria, Finland, Hungary and Italy) are expected to avoid any banking sector-led economic impacts.

In terms of GDP growth, most economists forecast that Brexit will not lead to a marked deceleration in growth in the short to medium term. According to the Bank of England, UK GDP growth is expected to rise from 1% in Q4 2019 to 1.6% in Q4 2020, 1.8% in Q4 2021 and 2.1% in Q4 2022.

In its economic outlook published in November last year, the BoE said that underlying UK demand growth “remains a little below potential in the near term but picks up during 2020 as the dampening effects from Brexit-related uncertainties begin to dissipate”.

With respect to foreign exchange, significant and sustained weakness in sterling would drive inflation higher, with negative effects on consumer incomes and activity. A weaker pound could, however, deliver significant benefits for exporters.

Consumer help

For consumers, the next 12 months could be very turbulent and expectations could change very rapidly depending on how negotiations unfold. The final deal could potentially restrict entire industries in a significant way and banking could well feel the wrath of European technocrats at how inefficiently British politicians handled the Brexit process.

Here are some common questions that consumers may well be wondering about with respect to the implementation period and post-Brexit:

Will I be able to send or pay in Euros electronically?

Yes, the UK has maintained its participation in theSingle Euro Payments Area (SEPA), meaning you’re able to continue to send Euros electronically.

However, you might find the time taken to process any Euro payments and transfers will increase.

I have a UK bank account, but will I be able to use my bank card to pay merchants in the EU?

Yes, this will not be impacted now the UK has left the EU. This is also the case if you have a bank account with a provider based in the EU and want to use your bank card in the UK.

Existing consumer rights and protections will continue to apply when using your card to pay for goods and services.

I am a UK resident — how will my insurance policies, personal pensions, annuities and other financial products from firms based in the EU be affected now the UK has left the EU?

Your coverage or product should not change because the UK has now left the EU because the government put in place legislation to enable financial services providers based in the EU to continue providing services in the UK for a temporary period.

The UK government has set up a temporary permissions regime to allow European providers to operate in the UK for a period after the UK has left the EU while they get permanent FCA authorisation.

Furthermore, authorities have drafted legislation for a financial services contract regime enabling firms that do not enter the temporary permissions regime to wind down their UK business in an orderly fashion.

To be completely sure of your consumer rights and contract terms, contact your product provider directly, as soon as possible.

Will the Financial Services Compensation Scheme (FSCS) apply after Brexit?

The existing FSCS protection framework will continue to apply until 31 December 2020.

FSCS protection for deposits will depend on several factors including where the firm is authorised and in which jurisdiction the firm holds your deposits.

Now the UK has left the EU, how will this affect the value of my stock market investments and invested pension funds?

It’s almost impossible to forecast how the still undecided set of future policies between the UK and the EU will impact asset values.

There are multiple factors that influence valuations including monetary/fiscal policy, trade deal terms, private sector decision making, investor sentiment and business conditions to name just a few.

There may well be a period of temporary financial instability, leading to declining asset values. Whether the declines are persistent or transitory will be largely dependent on how trade deal negotiations are conducted and how the new operational landscape appeals to banks and other companies.

If you own non-liquid assets in the EU, it may well be worth waiting it out and allowing the markets to recover before you decide to sell because regardless of how economically jarring Brexit is, markets tend to recover over time.

However, if you’re keen to liquidate your investments in the near future, you should obtain professional financial and tax advice as soon as possible and allow for ample preparation time before December 31, 2020.

George Tchetvertakov

George Tchetvertakov has vast experience in the foreign exchange area. He works for companies like Alpari, one of the top forex firms in the UK, and for Moneycorp, one of the industry leaders in money transfers, among others. Nowadays he is a freelance writer who writes for us, as well as large publications and several publicly traded companies.

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