What impact will a Brexit have on the South West financial services industry?

Paul Rodwell, Head of Financial Services Advisory for the South West, Grant Thornton UK LLP discusses the potential impact a Brexit will have on the south west financial services industry and what firms can do to prepare for this.

It’s an industry that supports more than 7,000 jobs in the South West and contributed more than £7 billion to the regional economy in 2014. Financial services is a growing sector in our region, with major players Aviva, St James’s Place and Nationwide amongst the region’s largest employers. But the Brexit debate looms as a big source of uncertainty. Hot on the campaigning trail, Economic Secretary Harriett Baldwin recently visited Swindon to warn that a vote to leave would be an act of ‘economic self-harm’.

Whether you’re in the Leave or Remain camp, there are a number of ways that a possible Brexit might impact financial services in the region. Here’s what you should consider…
1. New challenges over regulation

A ‘Brexit’ could reduce overall industry stability as any crisis may be met with divergent responses from UK and EU regulators. It could also pose a thorny legislative challenge, with over 40 years of regulation not formally enshrined in UK law.

A high priority in Brexit negotiations will be to find a rapid solution to continued passporting arrangements between the UK and the single market. Whatever the outcome, there will likely be an on-going need to comply with new EU regulation in order to continue to conduct business across the EU.

Ultimately, though, the regulatory picture is complex. Many financial and banking rules are set by global regulators while in some areas it could be argued that UK regulatory standards are higher than those set by the EU, suggesting any immediate impact may be limited.

2. Competition from European finance hubs

It could be argued that the industry is unlikely to be challenged by ‘Brexit’ in the short term as it enjoys considerable competitive advantages and a highly developed ecosystem of capabilities and support services that would be hard to quickly unwind or replicate elsewhere.

However, over time, competing European financial centres may renew attempts to attract key Euro related activities and infrastructure, using the argument that these are better conducted from within the Eurozone under EU supervision.

The UK may find it harder to resist such attacks after losing the protection of the European Court of Justice.

3. Implications for cross border trade

One of the largest risks to the sector is the potential loss of passporting rights for firms based in the UK, looking to sell services into the EU. Many firms already have distribution or servicing hubs within the EU, such as Luxembourg or Dublin. These take advantage of local knowledge and expertise or deal with indirect obstacles to trade within the single market for services, such as tax. Many businesses may wish to look at their footprint to re-determine if all their cross border operations are required given that greater complexity usually comes with greater cost.

What firms can do to prepare

With some big issues at stake for the sector and a large number of risks and unknowns, if this hasn’t been carried out already it is important that companies use the remaining time before the EU referendum to consider the business implications and actions required of a potential exit.

It’s important to understand your business’ overall degree of exposure, not just directly, but also that of your counter-parties, customers and suppliers. Consideration should also be given to appropriate contingency planning, with at least initial identification of resources and support in order to cover off the largest risks and most likely outcomes.

One prediction that we are confident to make is of a sustained period of business uncertainty in the run up to a ‘Brexit’ vote, and beyond should a decision to leave be taken.

By understanding potential risks and putting strong plans in place to handle them, companies can go some way towards mitigating the immediate impact and be in a stronger position to capitalise on longer term opportunities as these arise.