A lot has been written and speculated about how Brexit will play out so I thought I’d write something about what we don’t know. I’ve avoided using the adjectives hard or soft and the focus of this piece is primarily on the financial services market.
1 – We don’t know PM Theresa May’s plans.
This is not necessarily a bad thing. It would be unusual for a deal negotiating team at a bank, corporation or law firm to give and take briefings about how they are negotiating a particular deal with all their colleagues.
2 – We don’t know who is going to scrutinise the Brexit negotiations.
To me, planning for and negotiating to exit the EU is akin to planning for a battle and as John Travolta’s character in Broken Arrow so eloquently put it, “[Battle] is a highly fluid situation. You plan on your contingencies, and I have. You keep your initiative, and I will. One thing you don’t do is share command.” Decisive planning and leadership is probably more important than a negotiation by general consensus. Theresa May’s term in office will be characterised by one thing – how she leads the UK through Brexit.
3 – We don’t know if the City of London will keep passporting rights after Brexit.
People argue that much depends on the UK keeping the passporting rights currently available under EU single market legislation such as the Markets in Financial Instruments Directive (MiFID), Alternative Investment Fund Managers Directive (AIFMD) or Insurance Mediation Directive (IMD), which enable cross-border financial services regulated in the UK to be provided into EU member states. This is probably true.
However, the reverse proposition also needs to be considered: many EU (or EEA) firms also passport in to access the UK market – a developed global financial services market with a deep pool of capital and the second highest GDP in Europe after Germany. Wouldn’t these firms want the EU to keep these rights? According to figures from the Financial Conduct Authority (FCA), there are over 8,000 firms passporting into the UK (especially investment firms and insurance companies).
4 – We don’t know if London will lose its position as the leading global forex trading hub.
London’s share of global forex trading fell from 41% to 37% according to the last triennial survey conducted by the Bank for International Settlements (BIS) in 2016. This market share may be under further threat post-Brexit with some currency trading (e.g. the Euro) moving out of London. However, London’s global share far outweighs second-placed New York (19%) and the combined share of Frankfurt and Paris (4.5%).
5 – We don’t know what the future holds for the UK outside the EU.
If the UK leaves the EU and there isn’t any negotiated access to the EU single market then, assuming there is no dramatic change in current laws or regulations post-Brexit, the UK could be viewed as a country that has an equivalent financial services regime to the EU. There is a list of countries (e.g. Australia, the USA and Singapore) that the EU deems equivalent in relation to their regulation of banks, investment firms and exchanges. The UK could be part of such a grouping in the future and thereby gain market access to the EU.
6 – We don’t know how upcoming elections in France and Germany will affect the EU landscape.
Brexit is above all a political move. Elections in 2017 in France (April – May) and Germany (September) will have some bearing on who is at the table negotiating Brexit or what cards they have in their hands.
7 – We don’t know how far the Pound will fall.
In the wake of the Brexit vote, we saw the Pound dramatically and then steadily fall from close to $1.50 to $1.22 (midday 12 January 2017). It doesn’t seem that long ago when the Pound was $2 (September 2007). How much further will it fall? Prices that depend on imports will go up but, at the same time, UK exports will become more competitive globally and this may help create jobs. Has the UK managed to devalue its currency by the back door?