Macron wins: hard Brexit anticipated, what will be the impact on the UK financial services ecosystem?

Brexit Severity Index[1]
Previously: Level 5
Now (after the French election): Level 7

Macron’s election win will undoubtedly have a significant impact on the stance that the EU will hold with regard to Brexit. Whilst the Brexit negotiations are difficult to predict and ever-changing, a hard Brexit is favoured by the new French president, who has insisted on “defending the integrity” of the EU’s intertwined freedoms of movement and trade. Macron has stated Brexit is a “crime” which will leave the UK facing “servitude”. His new mandate provides him with the opportunity to substantiate his call for a hard-line approach to the coming negotiations, and warnings that there can be “no caveat or waiver” to the EU’s “unbreakable” position of serving its own interests first.
 
What does a hard Brexit mean for the UK financial services ecosystem and in particular the corporate and investment banking (CIB) industry?
The overall UK financial services ecosystem currently equates to an annual UK revenue of GBP 200bn and full-time employees (FTEs) of 1.05m. In the case of a hard Brexit, our forecasts state this whole ecosystem will decrease by 15-20%, within the range of GBP 170-160bn UK revenue and 890-840k FTEs (UK GDP nominal amount falls around 2%). Within the UK financial services ecosystem, we predict the CIB market, due to its international outlook, will decrease by 20-30% from GBP 44bn UK revenue and 110k FTEs currently to a range of GBP 35-30bn and 90-75k respectively (UK GDP nominal amount falls around 0.5%). Within all this it must be noted that the UK financial services ecosystem currently represents 10% of annual UK GDP and 3.1% of UK jobs.
 
Why could a hard Brexit severely impact the UK?
Over the next 2 years there will be a great deal of uncertainty in the UK due to the ongoing EU negotiations, which will now likely be tough with a hard Brexit. This lack of confidence will cause the UK economy to grow at a slower rate. The plausible loss of passporting rights will lead to relocations across all sectors within the UK. New tighter immigration controls as well as a less international and more insular UK will cause a loss of talent from the UK. The main antidote that can be used by the UK is the introduction of lighter regulations and lower tax in a post-Brexit UK, which could attract business inwards.
 
Will EU financial centres be able to capitalise on a hard Brexit?
All EU financial centres will hope to gain from the Brexit aftermath and London’s financial services exodus. However the current GFCI 21 global financial centre ranking places London in 1st with the closest EU competitors being Luxembourg in 18th, Frankfurt 23rd, Paris 29th and Dublin 33rd. Consequently unless EU financial centres manage to react quickly and make their locations more attractive by upgrading their financial services business environment and infrastructure as well as possibly offering lower corporate tax rates, their chances of attracting significant business away from London are low. However this will not prevent certain financial actors within the financial services ecosystem from potentially setting up new small hubs in other EU financial centres in order to have an EU hub as well as their existing London base. For example this includes Asset Management having a new EU financial centre in Luxembourg and the CIB industry creating a new EU hub in Frankfurt.
Whilst it is unknown how severe Brexit will finally be or whether the EU will fully capitalise on the UK’s potential loss of financial services business, one matter is certain, with the UK and German elections coming up soon the European financial services ecosystem will be watching developments closely.

Issue 2: after the UK election (June 8th 2017)
Eurogroup Consulting contact email address: finance.newsletter@egc.co.uk

 

[1] Level of severity ranges from 1 = very soft to 10 = very hard. Eurogroup Consulting is currently undertaking an in-depth study on Brexit and the index comprises advanced research and statistics across a number of drivers that will impact Brexit.