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Brexit – The Services Puzzle

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Baskar Sundaram

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Focus on goods has undermined the impact on services sector

Most of the Brexit discussions so far have veered heavily towards its impact on physical goods and their movement across borders. However, the focus on border controls and achieving frictionless trade in goods has inadvertently shunned a large chunk of companies operating in the services sector – a sector that generated £31 Billion in trade surplus for the country in 2018.

A case could be made for the crown jewel of the services industry in the country – financial services. Britain’s financial services industry is one of the most evolved and dynamic and is well-acknowledged across the globe for its maturity.

In the days immediately following the Brexit vote in 2016, stock market went down, sterling weakened and consumer confidence was shattered. The first wave of shocks emanated by Brexit had a profound impact on the financial services industry. Although the markets have made a recovery since, it is established that Brexit and financial services are closely intertwined.

An extremely influential sector in the British economy and for good reason, financial services contributes almost 12% to the UK’s total GDP. It also generates around two million jobs and is the biggest contributor to the country’s exports, accounting for nearly half of UK’s trade surplus in services.

Britain’s financial sector is also vital for the health of its other EU counterparts since it lends close to £1.1 Trillion ($1.4 Trillion) to EU companies and governments. London is the hub for most of the financial activities happening in EU. Almost 87% of US investment banks employ their EU staff in London.

The biggest implications arising out of Brexit that could perhaps disrupt the financial services sector are the issues that surround ‘passporting’.

Passporting refers to the regulation of financial services in EU. It entails a process that enables any UK-based financial institution – banks, insurance companies and asset management firms etc. to sell their services and products into the rest of EU without requiring a license or regulatory approval, or even the need to set up a local subsidiary. Around 5,500 organisations in the UK rely on passporting to conduct business with rest of EU. Conversely, almost 8,000 firms in rest of the EU trade with UK using passporting rules.

Experts feel that in the event of a no-deal Brexit, EU would most likely cease passporting to the UK and the financial services sector could find itself in a lurch. Most likely, UK would have to rely on options to accede to EU passporting rules; however, that may force the country to yield on the very same issues (open immigration) that led to the referendum in the first place.

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