Brexit and financial services: the only certainty is uncertainty
By a slender majority of 51.9% to 48.1% the United Kingdom has voted to leave the European Union. The move will have ramifications for banking and financial services internationally as the country renegotiates its relationship with the EU and could topple London’s standing as a leading global financial centre.
Nothing will change immediately, but in the short-term the industry and the IT vendors that serve it will be hit by the uncertainty that will follow the vote and through the period of renegotiation.
In the longer term, much depends on how those affect the ability of London-based Financial Institutions (FIs) to operate in the EU under ‘passporting’ arrangements. While underlying IT needs and activity will remain the same in aggregate, they may move elsewhere, as budget centres and decision-making shifts into EU countries.
In capital markets and investment banking this is a particular issue as international FIs face potential changes to their legal entity status and location of some roles. There are also questions over the future of trading and clearing infrastructures, particularly for euro-denominated securities.
Uncertainty will affect projects in-flight
While there are no immediate changes to the operating environment for FIs – all EU-inspired laws that have been transposed to UK law remain in place until amended or repealed by the UK Parliament. The vote simply triggers a sequence of actions: the decision has to be approved by the government and the UK then invokes Article 50 of the EU Treaty, which begins a period of negotiation on the terms of withdrawal that is expected to last at least two years.
During that period the fundamental drivers of IT investment for the industry and institutions across Europe will remain unchanged of course but uncertainty over the outcome of the exit negotiations will undoubtedly see imminent IT projects paused or de-scoped, while some large-scale projects may be shelved indefinitely.
The longer the period of uncertainty, the greater the risk and the impact.
From a banking perspective, some of the biggest immediate challenges will come from the loss of the UK’s ability to passport FIs into the EU. Institutions which have European or global HQs in the City will be forced to re-evaluate, with the consequences of that rippling through the supply chain.
Immediate questions will be raised over the compliance requirements around European-level initiatives and regulations such as the second Payment Services Directive (PSD II) and the pan-eurozone SEPA Inst immediate payments project. With the implementation timelines falling well within the period in which exit negotiations will take place, there will be uncertainty (and inconsistency) in the way banks will respond.
The threat to the City of London’s position as a leading trading is perhaps even more profound. As things stand it appears the UK will diminish in importance as a hub for the financial services industry. At an aggregate level, total demand for software, hardware and services from financial institutions will continue to be buoyant, but vendors will need to adjust their go-to-market and implementation strategies accordingly.
Over the past 30 years London has vied with New York for the title of Financial Capital of the World, but it is worth bearing in mind this status can be almost entirely traced to the deregulation of the City of London in the ‘Big Bang’ in October 1986 when the London Stock Exchange monopoly on securities trading was removed.
This created an influx of Wall Street trading houses and large Europeans banks to London, who brought a completely different, more aggressive, culture to the market, and who quickly snapped up local broking firms and banks.
The City of today has been built around this, creating an infrastructure of service firms such as lawyers, accountants and IT professionals that would be hard for any other European centre to replace quickly, but the three decades between Big Bang and Brexit may one day be looked back on as a golden age.
By Ovum, an analyst and consultancy firm.