IMPACT OF BREXIT ON

FINANCIAL SECTOR

Student
[COMPANY NAME] [Company address]
Abstract
In this paper the impact of Brexit on financial sector is studied. The referendum is being held now
because people and politicians argue that the organization has extended its control over more sides
of daily lives, EU has held Britain back, and hence many rules are imposed on business, UK pays
billions of pounds as membership fees per year, and the return they get is very less and people and
politicians want to take back the control of its borders fully. The financial sector of UK is observed
to be adversely affected by Brexit. The advantages of leaving EU is difficult to identify. There are
alternate arrangements that can be adopted by the UK like coming into a bilateral agreement with
EU to reduce the negative economic implications. If the UK is not able to negotiate the
arrangements successfully, it will suffer adverse outcomes that may not be even thinkable.

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Contents
Abstract ......................................................................................................................................................... 1
Introduction .................................................................................................................................................. 3
About Brexit: What is happening and why? ............................................................................................. 3
Literature review........................................................................................................................................... 4
Impact of Brexit on financial sector .......................................................................................................... 4
Impact of Brexit on unemployment and mitigation: ................................................................................ 5
Analysis ......................................................................................................................................................... 6
Policy implications ........................................................................................................................................ 7
Reasons for UK staying in EU: ................................................................................................................... 7
Pros and cons of Brexit (Karet, 2015): ...................................................................................................... 7
Conclusion: .................................................................................................................................................... 9
References: ................................................................................................................................................. 10
Appendix ..................................................................................................................................................... 11

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Introduction

About Brexit: What is happening and why?

Brexit is an abbreviation for ‘British Exit’. It is a short way of saying that United Kingdom (UK)
is exiting or leaving European Union (EU). This term was taken from the time when Greek left
EU which was called Grexit at that time. David Cameron, the Prime Minister of UK, declared a
referendum that Britain should remain in EU or not. This referendum will be held on June 23,
2016, in which all the people (British, Irish, Commonwealth citizens, UK residents living abroad
and members of the House of Lords and Commonwealth citizens in Gibraltar) will vote and will
say ‘yes' or ‘no' to the question raised. The side that gets more than half of the votes will win and
that view will be considered for taking any decision. The wordings of the referendum is: "Should
the United Kingdom remain a member of the European Union or leave the European Union?"
(Cressey, 2016).

European Union is a partnership, economic and political, between twenty-eight countries that
fostered the idea of economic cooperation after World War two i.e. the countries in EU will trade
together and not conduct a war among themselves. So EU has developed into a single market, uses
a single currency ‘euro' and follow its set of rules set by its own Parliament. Britain decided to join
EU in 1975.

The referendum is being held now because there was pressure on the Prime Minister to do this,
which was resisted by him initially but he agreed later. The people and politicians (UK
Independence Party, many conservative MPs) feel that EU has changed over the past 40 years.
Many countries have joined EU till then, and they argue that the organization has extended its
control over more sides of daily lives. They also feel that EU has held Britain back, and hence
many rules are imposed on business. The country pays billions of pounds as membership fees per
year, and the return they get is very less (Cressey, 2016). One of the principles of EU is that the
member countries don't need a visa for visiting and living in another country of EU, so the people
and politicians want to take back the control of its borders fully.

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Literature review

Impact of Brexit on financial sector

The financial sector of UK is world’s largest financial sector. Brexit will make the downgrading
of UK’s financial sector inevitable. Around 250 foreign banks exist in the financial sector of
London, and they have access to a single market under the membership of EU. Nearly ten percent
of UK's GDP comes from this sector; it contributes to the Treasury tax receipts for about 12%.
This sector is also the biggest exporter in the world of wholesale financial services, it employs a
huge number of people from all over the world, and, therefore, it contributes to secondary jobs
(Cressey, 2016).

If UK exits EU, the banking industry will lose its access to the single market of EU. So the big and
major banks will relocate from the UK to maintain their access to the previous Euro markets. Some
banks of US are already in the process of making contingency plans to move to Dublin in the case
of Brexit. Brexit will remove the status of UK as the largest financial center in the financial system
of Eurozone. The country will lose a lot of revenue due to this. Also, important privileges will be
lost like the export of capital and goods that are tariff-free in EU will be gone due to Brexit
(Cressey, 2016).

If Brexit happens, then Britain will be regarded as ‘third country’ by EU i.e. the country outside
EU, and it is a rule that if any country wants to access the EU markets, then it first have to maintain
the regulation and supervision of financial sector equivalent to that of European Union. So, Brexit
will put the burden of EU regulations on Britain if it would want to trade with its biggest trading
partner and the UK will don't have the authority to say anything about those standards ("Brexit or
Bremain?", 2015).

There is a right termed as ‘Passporting' in which any company established in any country of
European Economic Area has the right to offer cross-border services, and it can open branches in
other economies of EEA. This right greatly contributes to the appeal of London as a global
financial center as the size of the financial market of EU is very large. Brexit will lead to loss of
the right to a passport for the UK and there will be fall in financial exports. 41% of UK exports of

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financial services are accounted by EU (see appendix for the distribution) and UK will suffer huge
loss in term of these.

A report on financial sector of Brexit concluded that financial services of UK and the insurance
companies are exposed the most to Brexit because they run huge trade surplus with European
Union. UK will lose the right to vote in decisions of EU and hence the barriers to entry will be
increased as per new regulations of EU over which UK will have no control ("Brexit or Bremain?",
2015).

UK’s financial services is an industry that is highly regulated and majorly the regulation emanates
from Brussels. Red Tape will restrain UK if Brexit occurs (Cressey, 2016). After Brexit, if UK
wishes to continue doing trade with the remaining members of European Union, it will have to
comply with regulations of EU and UK will no longer in the position to negotiate with EU,
influence or challenge those regulations.

Impact of Brexit on unemployment and mitigation:

There are a lot of things that are still unclear as to what will happen if UK exits EU. On of this is
the employment of people. If UK and EU mutually agree to remain as a single market even after
the exit, then the free movement of people will be allowed and no major impact will be seen on
the employment of people, the jobs will be retained, and lose to people will be less. But if the UK
government imposes restrictions on work permits as they are against the free movement of people
and want to retain control over their borders, and other countries reciprocate to it in a similar
manner, then members of UK will need visas to work in other countries of EU and vice-versa.
Statistics says that Brexit will lead to loss of jobs to 2.2 million citizens of EU who are employed
in the UK and they could be forced to leave. The current jobs of people will be affected, and they
may not be given visa for the country in which they are working. Hence, they might lose their jobs
(Drea, Angelou & Freudenstein, 2015).

Similarly, the immigration will be affected. The UK or other countries in EU might introduce a
work permit system in which only the skilled people may be allowed to move from one country to
another and for those sectors where demand is more and supply of people is less. Britain already
faces a shortage of labor, and essential skills and Brexit will only exasperate this situation (Drea,
Angelou & Freudenstein, 2015).

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Analysis
Brexit will have an impact on the location, cost and liquidity of financial services in the UK if the
competitive position of London is undermined. The big banks of Europe have important operations
in London, and it will be costly for them to relocate. London has a dominant position in many
areas of product, and it is an international center of financial services. This position is threatened
and can be destroyed if a huge amount of business of Europe migrates due to Brexit. The risk of
some important business like derivatives may leave Europe altogether. Paris, Frankfurt,
Amsterdam and Dublin are the beneficiary in EU. But they do not carry the talent of replicating
the advantages of the ecosystem of London overnight that includes financial services and skilled
staff, market infrastructure, etc. There would be a loss to business in Europe because of higher
charges, poorer products and low liquidity. The organizations in Europe will not find it
comfortable and will be costly for them to raise capital in London, which is one stop shop currently.
The balance of financial regulatory debates will change in Europe due to Brexit. The UK needs to
follow a more interventionist approach and risk-averse approach to regulating the market.

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Policy implications
Reasons for UK staying in EU:
David Cameron, the Labor Party, SNP, Lib Dems want the UK to stay in the European Union.
They feel that EU membership gives the UK a bigger boost because it becomes easier for UK to
sell things to other countries of EU. The economic growth is also enhanced because the smooth
flow of immigrants makes it easier to employ young and talented people. It is feared by the
supports that if UK leaves EU, its status would be damaged in the world as countries don’t leave
EU easily. The business will be negatively affected if UK leaves EU because it will be very
difficult to move money, goods, and labor all over the world.

Pros and cons of Brexit (Karet, 2015):

1. Membership fee: UK can save costs annually as its contribution to the budget of EU will
decline. The money it pays to EU is more than what benefits it gets in return. But the
financial advantages UK gets due to EU membership in terms of free trade and inward
investments will be lost and it will outweigh the upfront costs.
2. Trade: The member states of EU import and export among themselves free of tariffs and
more than 50% exports of UK are driven to EU countries. Also, Britain has the right to
modify the trading rules if it remains a member of EU. If UK leaves EU, the negotiation
power of UK will be lost but at the same time, it can establish its separate trade agreements
with rest of the world like with US (creating biggest free trade area of world).
3. Investment: The status of UK as the world's largest financial center will be lost if it exits
EU. But it can also be an opportunity for the UK to reinvent itself as an economy of
Singapore-style.
4. Immigration: Under the law of EU, any member country cannot prevent any other member
who wishes to come and live in the country. Due to this, there has been an increase in
people coming to Britain from other states in huge numbers especially from Eastern and
Southern Europe. The UK has lost the control over its borders and problems with housing
and service provision has increased in the UK (Ross, 2016).
5. Jobs: Some studies have shown that Brexit will lead to loss of 3 million jobs. But if the UK
can raise its trade and investment post-Brexit then new jobs could be created for people in
the UK.

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6. Security: UK might be opening the doors to terrorist attacks if it continues to be with EU.
But if it remains with EU, it can exchange criminal records with member countries and
together they can work to counter the potential threats of terrorism.

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Conclusion:
The financial sector of UK is observed to be adversely affected by Brexit. The advantages of
leaving EU is difficult to identify. The UK claims some newfound freedoms that will be achieved
due to Brexit and the structure of its operations will improve vis-à-vis the rest of the world. But
this claim is colorless. Whatever the negotiations UK will be able to do with EU for the kind of
arrangements that will shape the financial services of UK (S&P, 2015). If UK wants to retain its
access to the single market of EU, it can become the member of EEA. Switzerland is into a bilateral
agreement with EU which is also an option available to the UK. There are alternate arrangements
that can be adopted by the UK to reduce the negative economic implications. If the UK is not able
to negotiate the arrangements successfully, it will suffer adverse outcomes that may not be even
thinkable.

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References:
Brexit or Bremain?. (2015). Chemistry & Industry, 79(11), 44-47.
http://dx.doi.org/10.1002/cind.7911_17.x

Cressey, D. (2016). Academics across Europe join ‘Brexit’ debate. Nature, 530(7588), 15-15.
http://dx.doi.org/10.1038/530015a

Cressey, D. (2016). News — Brexit. Nature, 531(7596), 559-559.

http://dx.doi.org/10.1038/531559a

Dayson, C. (2013). Understanding financial vulnerability in UK third sector organisations:

methodological considerations and applications for policy, practice and research. Volunt Sect Rev,
4(1), 19-38. http://dx.doi.org/10.1332/204080513x663796

Drea, E., Angelou, A., & Freudenstein, R. (2015). BREXIT In Focus: six ways it will
fundamentally change the EU. European View, 14(2), 317-317. http://dx.doi.org/10.1007/s12290-
015-0370-6

Heading For a Brexit?. (2013). The RUSI Journal, 158(4), 19-19.

http://dx.doi.org/10.1080/03071847.2013.829655

Karet, I. (2015). Brexit – more downside than up. Journal Of Intellectual Property Law & Practice,
11(2), 75-75. http://dx.doi.org/10.1093/jiplp/jpv214

Ross, M. (2016). Britain’s Post-Brexit Options: Alternative Lifestyles. CFA Digest, 46(2).
http://dx.doi.org/10.2469/dig.v46.n2.14

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Appendix

Source: (Dayson, 2013)

Source: ("Heading For a Brexit?", 2013)

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