The day has come. With UK prime minister Theresa May due to formally trigger Article 50 of the Lisbon Treaty on March 29 and start the negotiations for the UK’s exit from the EU, the first step into uncertainty has been taken.
The only thing that is certain, however, is that the UK’s financial services industry, which contributes an annual £120bn ($149.5bn) to £125bn in gross value added to the UK economy, will keep a watchful eye on the process.
And after Ms May’s Lancaster House speech in January quashed all hopes of the UK remaining inside the EU’s single market, the sector’s fears over retaining access to the European market seem justified, as the UK's institutions will likely lose their current passporting rights.
Should this be the case, the financial sector will need the government to seek access to EU markets through the EU’s equivalence arrangements for third-country access (something Switzerland also relies upon), and ensure that equivalence rules are guaranteed to continue as financial services regulation develops.
The future of London’s euro-denominated clearing business is also uncertain, given the European Central Bank’s (ECB's) previous attempts to repatriate this to the eurozone.
The direct impact on the UK of moving clearing houses to the continent would likely be small in terms of lost revenue and jobs, say experts from economic think-tank Bruegel. However, should the UK keep the clearing business, Brexit could make central clearing counterparties wary of the fact that the UK, as a non-EU member, would have no legal means to force the ECB to credibly commit to liquidity swap agreements.
For the sake of the UK’s financial services industry, during negotiations the UK government should point to the strengths of its financial sector, in efforts to remind EU economies of their reliance on services provided by the UK.
That leaves the UK financial sector to hope that EU representatives conclude that co-operation with UK institutions would be more effective for both the EU and UK, rather than trying – and potentially struggling – to create a replica of the UK ecosystem within the EU.
But so far, up to two years stand between any conclusion.
