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Executive summary

In 2016, 52 & of UK’s citizens voted in favor of departing from EU, a historic event dubbed as "Brexit." Since this historic event, speculations have been rife around the effects of Brexit on the UK economy – more so the financial sector. Owing to the vote to leave EU, Brexit has led to setting a hungry cat among the financial pigeons within the City of London (Who, 2016). The City of London stands to lose about £18 billion in revenue & over 30,000 jobs by leaving the single market (Oliver Wyman 2016). This evaluation suggests that these approximation accounts for roughly 15% of financial sector revenue and 3 % of employment in the City. Based on these estimates, Brexit will have adverse effects on financial sector of the City of London & whereby it will lose 12–18% revenue and a 7–8% decline in employment, clearly significant impact.

Effects of Brexit to the financial sector in the City of London

Impact on forex trading

If there’s a single activity that the City of London dominates is foreign exchange trading (Buller, and Lindstrom, 2013, p, 393). Bankers are divided regarding exactly how endangered London’s crown is now that the nation has chosen to leave EU— the City had been dominant for decades prior to the establishment of EU and its forex trading has expanded after the creation of the EU single market and, still more. However, it’s continued claim as the globe’s main location for trading the euro — a $2tn a day market appears to be vulnerable (Wyman, 2016).

Effects on the insurance sector

London used to commands one third (1/3) of the $18bn worldwide marine insurance market. Of that, insurers pointed out 40 % is cross-border EU business. The capacity to write business from London passport-free across the EU ensures prices low. However, after the vote to leave EU, many insurers would not have the freedom to write cross-border business as they did initially and as a result they would be forced to set up local operations across the EU, and which would be costly for them. Since 75 % of insurance and reinsurance services are offered through subsidiaries, approximately a quarter of these revenues, or £1 billion, might be lost to competitors as a result of Brexit.

Asset management

About £6 billion, or 25 % of UK asset management revenues, comes from EU-associated business and which will directly be impacted by Brexit. Owing to this, investment activities would become costly and complex for clients. Roughly a third to half of this EU-related business, £2–3 billion, might look for a new home.US private equity funds such as Blackstone and Carlyle have pointed out that they are intending to set up pass porting rights in Luxembourg to retain the capacity to do business in the EU after Brexit (Djankon, 2017).

Effects on the banking sector

Banking around £25 billion in revenues comes from EU-related banking business, or 23 % of the entire retail and business banking. Banks that are dependent on EU markets shall experience the rise of their operation expenses dictated via reorganization and possibly the urge to open up other subsidiaries within the EU. Owing to this, smaller banking institutions might consider leaving the City. So far, just one global bank, the Russian bank VTB has announced its intention to relocate its European operations wholly away from the city of London (McMahon, 2017). Other banks have announced deep staff cuts within their City operations, like HSBC which is shifting over 1,000 jobs to France.

Merits and Demerits of Brexit

Changes in regulatory environment and access to customers

Protectionism has been on the rise after Brexit. Before Brexit, the UK had introduced the Diverted Profits Tax. Brexit has resulted to the rise of protectionist pressures whereby each tax authority wants more of a share of the Cake. VAT rules when it comes to intra-EU supply will not apply. UK's situation may change to one more akin to Switzerland. This shall raise G&A costs for UK headquartered companies. All business dealings between Britain and the EU will require the creation of newer rules. One of the primary arguments of the pro Brexit camp is that the EU diminished UK’s sovereignty through interfering with its domestic laws (stifling firms more so SMEs with unnecessary red tape) (Harold, 2017, p, 32).Most of the firms in UK would not be subjected to tough EU regulations. The UK shall no longer be bound by the European Parliament that is seen by many to be undemocratic.

Consequences for the skilled personnel

The vote to leave EU would have adverse effect to London. Research done by Deloitte established that 47% of highly skilled workers from the EU would leave UK in the next five years. The report went on to note that generally, 36% of non-British workers in London pointed out that they were considering leaving within the same period and which is a representation of 1.2m jobs out of 3.4 million migrant workers in UK (Wyman, 2016). The main reason why the skilled workers pointed out that they would leave London relates to the fact that they fear discriminatory hiring practices.

Locational decisions of businesses

As earlier noted, Brexit will force many firms to change the location of their business (Politics and policy, 2017). A case in point, the Russian bank VTB has announced its intention to relocate its European operations wholly away from the city of London and HSBC which is shifting over 1,000 jobs to France. Before the vote to leave EU, Britain and more so the city of London was viewed as the gate way to EU hence many firms chose to set up their operations within the City of London (Kynaston,2012). However, the vote to leave has taken away this competitive edge from the city of London due to regulatory issues. The merit of Brexit is that other Firms have opted to remain within the city of London owing to its strategic location (easier access to other EU nations).

Conclusion

Before the vote to leave EU, the city of London played a vital role when it comes to the financial sector of Britain. The vote to leave shall have adverse effects to its financial sector like insurance, asset management, banking sector and forex trading. The vote to leave has brought with it merits and demerits to London in terms of changes in regulatory environment and access to customers; consequences for the skilled personnel; locational decisions of businesses.

Bibliography

Buller, Jim and Lindstrom, Nicole (2013) Hedging its Bets: The UK and the Politics of European Financial Services Regulation, New Political Economy, 18(3), pp. 391-409

Djankov., S., The London School of Economics and political Science. The biggest threat to the City of London is now uncertainty. [Online]

Available at: http://blogs.lse.ac.uk/brexit/2017/03/20/the-biggest-threat-to-the-city-of- london- is-now-uncertainty/[Accessed 16 October 2017].

Harold D. Clarke, M. G. P. W., 2017. Brexit. 3rd Ed ed. Cambridge: Cambridge University Press.

Kynaston, David. 2012. City of London: The History.London: Vintage Books.

McMahon, M., 2017. The implications of Brexit for the City. [Online]

Available at: https://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publicatio ns/80_mcma[Accessed 16 October 2017].

policy, P. a., 2017. The Drawbacks and Advantages of Brexit. [Online]

Available at: http://politicsandpolicy.org/article/drawbacks-and-advantages-brexit

[Accessed 16 October 2017].

PWC, 2017. Leaving the EU: Implications for the UK economy. [Online]

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Woh,I.,2016.TheImpactofBrexitonfinancialServices.[Online]Availableat:https://www.usitc.gov/p ublicatio ns/332/executive_briefings/wohl_brexit_and_finncial_services_final.pdf[Accessed 16 October 2017].

Wyman, O., 2016. The impact of the UK's exist from the EU on the UK based financial service sector. [Online]Availableat:http://www.oliverwyman.com/content/dam/oliverwyman/global/en/2016/ oct/OW report_Brexit impact on Uk-ba[Accessed 16 October 2017].

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