The City and Brexit: Four unknowns if the UK votes to leave the EU

The City and Brexit: Four unknowns if the UK votes to leave the EU

The first referendum on Britain leaving the European Union actually goes back to before the EU even existed. The electorate voted 67.2% in favour of staying in the European Economic Community in 1975.

Recent opinion polls suggest a much closer margin as the June 2016 referendum approaches. The potential effects of a British exit from the EU are wrapped up in doubt and uncertainty for many businesses, and especially for finance professionals.

1. Changes to tax regulations

EU regulations on UK businesses have been a sore point for a long time, with many accusing Brussels of hampering UK businesses with unnecessary imposed bureaucracy. Over two thirds of respondents to the Centre for the Study of Financial Innovation (CFSI) survey of the financial services sector’s views on Britain, the EU and Brexit pointed to the way in which the Government appears to ‘gold-plate’ EU legislation. [1]

Whoever’s to blame for the bureaucracy of EU-imposed legislation, it’s likely that we can look forward to more regulatory freedom if we were to leave the EU. The growth in the number of subsidiaries necessary to continue trading in Europe without access to the EU’s Single Market might be offset by reduced administrative demands regarding tax reporting.

2. New trade & business laws

There’s a worry for some that the lifting of EU regulations on financial organisations could lead to London’s financial institutions being seen as ‘not quite right for mainstream business’ [1]. This would lead to a loss of confidence, worsened by the UK losing political capital by backing out of the EU.

If the UK were to leave the European Economic Area (EEA), we wouldn’t be subject to the external tariff on goods and services entering that area, which could both give UK businesses more trading freedom, and reduce domestic demand by introducing cheaper imported services.

However, there could also be a substantial impact on businesses working with non-UK partners, as the freedom of those partners to deliver cross-border products and services directly would be reduced, or even eliminated.

3. Trading outside the EEA

There are concerns that the UK could face punitive measures either for political reasons, or to ensure that the UK cannot become a competitor of the EU in certain markets.

It’s possible that leaving the EEA would make it necessary for the UK to establish strong access to and interaction with non-EU markets. Increasingly wealthy and influential Asian countries, most importantly China, could become attractive markets for UK businesses and trade.

4. The future of London’s financial institutions

London’s status as the financial gateway to Europe might be the biggest unknown. The main concern is the loss of rights concerning ‘passporting’ financial services throughout the EU. Currently a firm authorized in an EEA state has the right to establish branches and/or agents in any other state, and to provide cross-border services. Overseas firms based in the UK may need to move some of their operations to Europe to continue trading smoothly, while UK-owned financial organisations might need to work through subsidiaries in order to deliver services to European states.

 

The Finance professional’s vote

Over 41% of respondents to the CSFI survey thought the European Commission was actually hostile to City interests, and yet 73% of financial professionals said they’d vote to stay.

With a non-EU future for Britain shrouded in uncertainty and strongly conflicting opinions even amongst those who agree on whether we should stay or not, the question of what Brexit would mean for the UK doesn’t have anything like a clear answer right now.

 

[1] The Centre for the Study of Financial Innovation: report