RUNNING HEAD: INTERNATIONAL FINANCE

IMPACT OF BREXIT

NAME

INSTITUTION
INTERNATIONAL FINANCE

Impact of Brexit on UK Financial services

Britain is a large market hence a clear incentive exists for other countries to negotiate a

deal. With UK being a member of the EU, it has been included in trade deals that have been

negotiated by EU. The trade agreements between EU and individual countries are about 22 with

five multi-lateral agreements consisting of multiple countries. The current trading partnership

will not be interrupted. The most immediate impact of Brexit is instability in the context that

business and markets will abhor uncertainty. The long-term impact of the Brexit referendum

could reduce the attractiveness of the United Kingdom (UK) as an international centre for

banking operations.

Within the first few days on the outcome of the vote, there has been a discussion on the

high number of United States banks exploiting contingency plans. They have been planning on

relocating some of their operations from the London to cities that are located in the European

Union member states. American banks took the initiative of moving the jobs out of London and

at least a British multinational bank headquartered in London is thinking of relocating 1000 jobs

out of London. The process of euro clearing from London to Paris will leave the UK market a

single market.

Models of economic relations

Several economic models have been developed to discuss post-Brexit options in the UK.

They include the Norway model, the Switzerland model, the Turkey model, the Canada option,

the Honk Kong and Singapore option and the default world trade organization ties.

The Norway model will involve being a member of the EEA, making financial

contributions, adoption of the EU laws, unrestricted access to the single market and free

movement of goods and services as it currently happens in the EU. People are allowed to work
INTERNATIONAL FINANCE

and live in Norway, but it’s exempted from EU regulations that deal with justice, fisheries, and

agriculture and home affairs. However, it’s argued that the UK may fail to secure full access to

the single market unless movement of free labour is allowed at all times. It was noted that it

would be possible to maintain access but extra cost shall be involved. The Switzerland model

involves being a member of the European Free Trade Association but a non-member of the EEA.

Bilateral agreements are used to govern access to the EU market. This model involves making a

smaller contribution but less than Norway’s, they lack the general duty to implement the EU

laws, but for it to carry out free trade and free movement of supplies, they will have to

implement some EU regulations (Gropp, 2016).

The Turkey model involves customs having union with the EU without quotas or tariffs

on goods manufactured in industries but which should be exported to EU but will have to take

into consideration the EU external tariff on goods imported from outside the EU. UK will not be

part of the European Free Trade Association and EEA, but they have a customs union with the

EU. This implies that it will not face quotas on goods exported to the EU and tariffs are not

imposed on them. The process excludes the agricultural services and goods. However, they lack

a say on the tariff amount to be imposed on goods imported from the non-EU countries. They

will have to apply the common EU external tariff to those goods involved. The fourth model is

the Canada option. The Comprehensive Economic and Trade Agreement (CETA) allows Canada

special access to the EU single market without the challenges faced by Switzerland and Norway

hence reducing trade tariffs. Other products such as chicken and eggs are not included. Canada

has to prove that the goods are mad in Canada.

INTERNATIONAL FINANCE

Analysis of economic integration

Statistics from the Office for National statistics indicated a decreased unemployment rate

from the in three months and a substantial rise in employment. This shows that there was no

hurry in firing or hiring during the period of referendum. Unemployment now ranges at 4.9%

representing its lowest figure since 2005. The employment rate is now the highest at 74.5% since

records started to be kept in 1971. The number of reported vacancies reduced by 7000 which

indicates that hiring rates slowed during the period.

Britain consumers went onto spending spree which sent sales in retail to increase by 5.9%

compared to previous period within the same month one year ago. Watches and jewellery

spending increased as well as other vintage goods. The strong consumer spending is expected to

support growth and reassure business that have been worried due to results of the referendum.

Wages increased by 2.5% in the preceding 12 months period while the purchasing power of

workers went up by 1.9% during the year- showing a positive sign for the economy and the

households wellbeing. Inflation increased by 0.5% in July, recording the highest figure for the
INTERNATIONAL FINANCE

last 20 months. The CPI inflation is expected to increase to 3% by 2017. If the CPI inflation

outstrips wages, then spending power of consumers will reduce (Wadsworth, 2016).

Threats and opportunities posed by Brexit

The European Union (EU) had a single market as one territory without any internal

borders or other obstacles in regulation that prevented free movement of goods and services.

With exiting from the single market meant that UK banks would lose pass porting rights to work

and operates in the European UNION and hence will attract tariffs for services, therefore,

making UL financial services exports to other European countries very uncompetitive. To

increase the problem further is the fact that banks from overseas especially the American banks

utelizing London as their main gateway to the European Union market. The UK banking

authorities will have to regulate their operations and hence might impinge on access of American

banks to the single market. These companies will be forced to explore other competitive markets

and options. Significant options include some operations will be moved from London to other

cities that are based within the EU, ensuring that they contain all appropriate regulatory

approvals to conduct their business in the single UK market. The American banks can further get

an EU license to operate outside of the UK after the Brexit (Jessop, 2017).

To remain in the European Economic Area meant that the UK would have to adapt all EU

financial rules and any other regulations and would lose its chance to block those they find

unattractive or onerous. The UK will thus be prevented from setting up an alternative for the

financial service market. This was expected could offer regulatory arbitrage option capable of

attracting business from the EU capital markets(Dublin, Paris, Frankfurt, and Amsterdam ) or

those in other parts of the world such as Singapore, Tokyo, New York and Hong Kong. The

financial service sector has tremendous importance in the UK economy while the city success as
INTERNATIONAL FINANCE

Europe main financial service hub is a central theme in the debate concerning Brexit. Both the

cons and pros of Brexit have been looked at from three perspectives to evaluate how it might

influence the landscape regulations, cross-border implications and the economic fortunes of the

sector (Moloney, 2017).

The first perspective involves assessing the regulatory impact of Brexit. It is argued that

regulatory standards of UK are higher than those set by the European Union (EU) with a limited

suggestion of any impact. The stability of the banking industry is reduced by Brexit since any

emerging crisis will be affected by the divergent responses from EU and UK regulators. It could

as well result in a serious issue with the legislation, with over more than forty years that has not

been part of the formally enshrined in the UK law (Moloney, 2017).

An urgent solution to continue pass porting arrangements between the single market and

the UK will be a high priority in the Brexit negotiation. A favourable outcome is highly probable

and relevant in the ability of the institution based in the UK to export financial services into the

EU. This may result in difficult future decisions by the multinational institutions on where best to

relocate. Despite any particular outcome, there is a need to comply with the new regulations of

the EU to allow for the continuation of business operations across the EU. With the exit of the

UK, firms that would like to conduct business in the EU will face demands on increase

regulations and with a very high chance that they shall comply with the MiFID 11 rules that shall

be introduced in January 2018.

Other main impacts of the Brexit include economic impact on the city. The city of

London is argued that it may not be challenged by the Brexit over short-term since it enjoys

ecosystem having highly developed capabilities, considerable competitive advantage and support

service that will be difficult to replicate anywhere or unwind. In the long run, competing for
INTERNATIONAL FINANCE

European financial centres may renew attempts to attract key infrastructure and activities that are

euro-related using the argument that they can be better done under Eurozone with the supervision

of the European Union. Such attacks may be difficult for the UK to counter after losing the

European court of justice protection. One major impact to the city includes slow down on the EU

talent that currently works in UK financial services. A requirement for work permit and visas

may create a barrier that could weaken the UK while strengthening financial centres that are

more welcoming.

Brexit resulted to further implications on the cross-border trade. The major risk in the

area includes potential loss of the pass porting rights for companies located in the UK, that are

looking for a means to sell their services and product to the EU. Swiss banking model could be

adopted by firms by operating through subsidiaries without pass porting rights. Some firms have

servicing hubs and other distribution channels within the EU such as Dublin or Luxemburg. They

exploit and take advantage of the local expense and knowledge or utilize the indirect obstacles to

operate within the single market for services such as tax. The various number of business may

want to check on their footprint to assess and re-determine if the remaining cross-border

operations given that higher complexity arises from the greater cost. Brexit is expected to be a

significant reduction in the financial service being exported to European Union. In the long run,

there would be a chance to compensate any potential loss by working on the bilateral trade

agreements with emerging financial hub areas such as Hong Kong, Singapore where the UK has

significant cultural ties (Gros, 2016). 

Opportunities and threats.

INTERNATIONAL FINANCE

Arguments for leaving

Some of the regulatory impacts for leaving are as described below. First, leaving could

reduce potentially burdensome legislation of the EU such as restrictive employment rights, bonus

cap, and proposals in the tax financial transactions aimed at improving the competitive position

of the City of London with the US and Asian financial centers. The institution in the UK could

gain from lower capital requirements introduced by the PRA. The institution in the UK already

complies with EU existing legislations which will facilitate participation in the European

Economic Area (EEA). Banking and financial rules are set by global regulators such as financial

stability board and Basel Committee (Sahr,2016).

The second argument is based on the economic sector impact. With UK having the

strongest financial sector in the EU due to the excellent legal system, a critical mass of skill set,

because of history, time zone, London cultural appeal, and expertise in professional services.

This trend is likely to be enjoyed by the UK even outside the EU. The prevailing market forces

will continue to exist. The innovative and strong firm in the UK should have the very best reason

to believe that discerning European customers shall remain to continue doing business with them

(Ebell, 2016).

The third argument for leaving is based on the cross-border impact on trade. Brexit will

gain a longer-term opportunity to improve on the bilateral trade agreements with other emerging

financial centers such as Singapore and Hong Kong which have maintained considerable

historical ties. The EU operates on the single market services that are imperfect. It is proper for

the global financial services firms to be adept in dealing with variations in the local market and

other hidden barriers to trade such as competing for tax regimes and unfavourable regulations.

Success can be related to Switzerland that operates its banking industry outside the EU without
INTERNATIONAL FINANCE

rights of pass porting. Banks in Swiss republic operate their European investment business in

banking using subsidiaries of London (Gros, 2016)

Arguments for staying

Regulatory impact for staying is as described below. First, with Brexit, a disadvantage

might arise due to the over 45 years of regulation that have not been enshrined formally in the

UK law. The banking stability will reduce as the management of the banking crisis will be done

by the UK authorities in conjunction with a limited EBA input. UK based firms will face a

potential loss of the pass-porting rights. By remaining in the EEA, the UK could preserve the

pass-porting rights though it will be the force to adopt the EU regulation while lacking the ability

to block or influence the damaging ones. Institutions that are non-EEA and that provide financial

services to the EU may face extreme barriers due to the introduction of MiFID 11 Rules as at

January 2018 (Holmes, 2016).

Second Brexit will result in short-term risk of financial stability given the high current

account deficit. The sterling volatility, availability, and cost of financing plus risk premium on

assets will increase due to prolonged uncertainty. Brexit is expected to restrict the free movement

of banking professional between the UK and Europe. In the long run, Brexit might reduce

growth in the sector that will affect long-term decisions on job creation, investment and the

period required for a new business to establish themselves across Europe.

Lastly, UK might lose protection enforced by the ECJ rules governing the single market.

This is because it currently leads in euro denominating banking wholesale derivative trading and

FX and countries in the Eurozone have been historically pushed to have key euro-related

infrastructure and activities be overseen by the ECB after being relocated within the Eurozone
INTERNATIONAL FINANCE

(Dhingra, 2016). Exports of financial services to the EU will be halved to around £10b due to

loss of pass porting rights (Jensen, 2016).

In conclusion, we can say that Brexit is expected to have damaging effect on the entire

economic development of EU. Severe political damage shall be witnessed which would weaken

geopolitical area of Europe. I am hereby convinced that a Brexit should be shunned because no

winners will emerge at the end of it. Only losers. Based on the recent studies about impact of less

trade activities on economic growth, the real GDP of UK will drop from 2% to 14% after

complete isolation in 2030 if UK will leave EU in 2018. Reduced trade will imply less pressure

from international trade. Companies will lack incentive on improving their productivity through

innovation and investment. The lower productivity will thus reduce long term growth of the

economy.

Reference

Belke, A., Dubova, I., & Osowski, T. (2018). Policy uncertainty and international financial

markets: The case of Brexit. Applied Economics, 1-19.

Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016). The impact of Brexit on

foreign investment in the UK. BREXIT 2016, 24.

Gropp, R. E. (2016). Financial market reaction to poll data suggests strong effects of a Brexit on

exchange rates and the banking system both in the UK and in the EU. Halle Institute for

Economic Research.

Gros, D. (2016). The Economics of Brexit: It's Not about the Internal Market. CEPS.
INTERNATIONAL FINANCE

Howarth, D., & Quaglia, L. (2017). Brexit and the Single European Financial Market. Journal of

Common Market Studies, 55(S1), 149-164.

Hunt, A., & Wheeler, B. (2017). Brexit: All you need to know about the UK leaving the

EU. BBC News, 25.

Jessop, B. (2017). The organic crisis of the British state: Putting Brexit in its

place. Globalizations, 14(1), 133-141.

Krause, T., Noth, F., & Tonzer, L. (2016). Brexit (probability) and effects on financial market

stability (No. 5/2016). IWH Online.

Moloney, N. (2017). Financial services, the EU, and Brexit: an uncertain future for the

city?. German Law Journal, 17, 75-82.

Ramiah, V., Pham, H. N., & Moosa, I. (2017). The sectoral effects of Brexit on the British

economy: early evidence from the reaction of the stock market. Applied

Economics, 49(26), 2508-2514.

Sahr, D., Compton, M., Carr, A., Wilkes, G., & Behrens, A. (2016). Brexit: what are the options

for the financial services industry?. Journal of Investment Compliance, 17(4), 45-53.

Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016). Brexit and the Impact of

Immigration on the UK. CEP Brexit Analysis, (5), 34-53.

Wenger, R. J. (2017). Should I stay or should I go: the effects of Brexit on family leave laws in

the United Kingdom. Duq. Bus. LJ, 19, 119.

Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016). The impact of Brexit on foreign

investment in the UK. BREXIT 2016, 24.

Pisani-Ferry, J., Röttgen, N., Sapir, A., Tucker, P., & Wolff, G. B. (2016). Europe after Brexit: A proposal

for a continental partnership (Vol. 25). Brussels: Bruegel.

INTERNATIONAL FINANCE

Dhingra, S., & Sampson, T. (2016). Life after BREXIT: What are the UK’s options outside the European

Union?.

Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016). Brexit and the Impact of

Immigration on the UK. CEP Brexit Analysis, (5), 34-53.

Kierzenkowski, R., Pain, N., Rusticelli, E., & Zwart, S. (2016). The economic consequences of

Brexit.

Gros, D. (2016). The Economics of Brexit: It's Not about the Internal Market. CEPS.

Schoenmaker, D. (2017). The UK financial sector and EU Integration after Brexit: The issue of

passporting. In The Economics of UK-EU Relations (pp. 119-138). Palgrave Macmillan,

Cham.

Scarpetta, V., & Booth, S. (2016). How the UK's Financial Services Sector Can Continue

Thriving After Brexit. Open Europe.

Jensen, M. D., & Snaith, H. (2016). When politics prevails: the political economy of a

Brexit. Journal of European Public Policy, 23(9), 1302-1310.

Ebell, M., & Warren, J. (2016). The long-term economic impact of leaving the EU. National

Institute Economic Review, 236(1), 121-138.

Dhingra, S., Ottaviano, G. I., Sampson, T., & Reenen, J. V. (2016). The consequences of Brexit

for UK trade and living standards.

Holmes, P., Rollo, J., & Winters, L. A. (2016). Negotiating the UK's post-Brexit trade

arrangements. National Institute Economic Review, 238(1), R22-R30.