Brexit four years on: What did it cost for the financial sector?

Four years on from Brexit, the UK financial services sector has not been impacted as strongly as it might have been suggested previously. However, international trade relationships are yet to make up for the missing ones with the EU, according to a report by asset finance broker Anglo Scottish Finance.

The UK left the European Union (EU) on 31 January 2020.

One of the biggest fears was that the country’s financial sector, accounting for 12% of GDP, would see a huge decline.

Four years and a pandemic later, it is not quite the case, however, with neither the ‘Remain’ campaign, accused of scaremongering, nor the ‘Leave’ campaign envisioning a brighter future, proving right at this point.

Which of the early Brexit predictions have proven to be accurate?

Fears that a big portion of the UK’s elite financial services companies would leave the UK in the wake of Brexit, turned out to be true.

Nearing the ‘divorce’, 44% of the largest financial services firms and 37% of fintech companies in the UK said they planned to move part of their operations to the EU.

More than four-fifths of them did move away eventually, most of them during the immediate aftermath of Brexit, cited the report findings of researchers at Anglia Ruskin University (ARU).

However, this trend appears to be reversing with businesses now looking to return, including Dutch company Bunq, the second-largest neobank in the EU.

Meanwhile, the UK and Switzerland announced a “first-of-its-kind” financial services deal designed to ally the two banking centres closer together in December 2023. It is thought that the deal would not have been possible while the UK was in the European Union.

According to the annual review of the UK financial services 2023 report, the UK attracted the highest amount of Financial and professional services (FPS) foreign direct investment (FDI) in Europe in 2022; more than £2 billion was invested in financial and professional services firms – creating almost 15,000 jobs.

Jobs in the financial sector were at the centre of predictions pre-Brexit, 2016 estimates predicted that 75,000 financial services positions would move from the UK to the EU as a result of Brexit – almost 7% of the total number of jobs in the industry.

According to the Anglo Scottish Finance’s report, the actual figure was estimated at about 7,000.

To support top finance talents to consider British opportunities despite offering less favourable working conditions and a higher cost-of-living than some other European countries, new regulatory policies are on the way.

For instance, the UK is about to break up with old EU regulations allowing employers to offer bonuses that exceed 100% of fixed pay.

International trade has more to go

Financial services are a vital part of international trade, accounting for one-fifth of all UK services exports.

A key point of the referendum was for the UK to become less reliant on EU trade and open up trading alliances with new countries.

However, between 2018 and 2021, there was an 18% decrease in financial services exports to the EU, with only a 4% increase in exports to non-EU countries to offset it.

Though the UK’s international trade has also had to put up with the consequences of the COVID-19 pandemic, between 2019 and 2022, the UK’s GDP growth was lower than the OECD, G7 and EU27 average, indicating an overall slump from an international trade perspective.

So far, new international trade agreements failed to make up for the missing trade with the EU. However, talks began with South Korea over a new and improved trade deal, and financial services, the UK’s second-largest services export to Korea, would hugely benefit from this deal.

Another multi-billion trade deal with India is also expected to be finalised in the near future, promising to be Britain’s biggest trade alliance since leaving the European single market.

But until such talks are finalised, “the general consensus is that Brexit has done little to strengthen Britain’s trading position internationally,” stated the report.

What are the prospects of the UK financial services?

The UK, and particularly London, remains a hotspot for fintech innovation, the report noted.

“With fintech poised to play a key part in the UK’s transition to net zero, it’s vital that the financial services sector has remained strong, and was not impacted as heavily as previously thought by Brexit,” Stuart Wilkie, head of commercial finance at Anglo Scottish, said.

The question remains – would the financial services industry remain stronger had the country simply not left the EU?

In the years since the UK left the EU, the value of the pound has never fully recovered to pre-Brexit levels. 

“An unparalleled global pandemic enormously impacted the finances of every country in the world, while war in Ukraine and the subsequent inflationary crisis have made it harder for the pound’s value to recover. […] Going forward, questions remain over the efficacy of the UK’s new trade deals,” Wilkie said.

The annual review of UK financial services 2023 notes that one of the top priorities for the UK-based financial and professional services sector is to strengthen the EU-UK business ties. Policymakers on both sides are working on finalising the Memorandum of Understanding (MOU) on financial services with the promise of setting up a bilateral financial regulatory system.