The study, conducted by consultancy Oliver Wyman and commissioned by lobby group TheCityUK, analysed and quantified the impact of potential regulatory options arising from the UK’s exit from the EU on UK-based financial services.
The team studied the impact in terms of jobs, tax and industry revenues and warned of the potential risks of a so-called “hard Brexit” in which the UK does not secure access to the single market.
According to the report, the UK-based financial services sector annually earns approximately £190-205bn in revenues, contributes £120-125bn in Gross Value Added (GVA), and, together with the 1.1 million people working in financial services up and down the country, generates an estimated £60-67bn of taxes each year.
Oliver Wyman report
It is in everyone’s best interests for there to be a positive outcome to the negotiations that is mutually beneficial to the UK and the EU
The research found that approximately half the sector’s revenues in the UK are from international and wholesale business.
Hector Sants, vice chairman of Oliver Wyman, said, “Our work provides a robust and definitive fact base to facilitate the dialogue between the sector and policy makers.
"It highlights that the impact of the UK’s exit from the EU on the UK-based financial services – and the jobs, income and taxes it generates – will vary dramatically with how much access to the EU is retained.”
The report estimated that if the UK secures the highest access scenario with continued access to the single market, it would lose less than £0.5bn a year in tax revenues and up to 4,000 jobs. Revenues are also predicted to decline by up to £2bn – 2% of total wholesale and international business.
However, in the lowest access scenario of a hard Brexit - a situation where the UK moves to a third country arrangement with the EU, without any regulatory equivalence and its relationship with the EU is defined by terms set out under the World Trade Organisation - 35,000 financial services jobs would be at risk and as much as £5bn in tax revenue per annum.
Up to 50% of EU-related activity (£20bn in revenue) would also be at risk, according to the report.
In this scenario, the impact on the sector would be greater than the loss of direct EU-related business.
The report highlighted that the UK-based financial services sector has developed over many years into an interdependent and interconnected ecosystem comprising a large variety of financial and related professional services firms working together.
It added that because of the interconnectedness of the activities and firms within this ecosystem, the effects of the UK’s exit from the EU could be felt more widely than simply in business transacted directly with EU clients.
These estimated figures could therefore be doubled if the knock-on impact to the whole financial services ecosystem is taken into account, which could result in the loss from the UK of activities that operate alongside those parts of the business that leave, the shifting of entire business units, or the closure of lines of business due to increased costs.
This means a potential £10bn in tax revenues and up to 75,000 jobs are at risk depending on the deal the UK secures with the EU – this being the worst-case scenario, according to the report.
It acknowledged that while it is impossible at this stage to predict what the UK’s new relationship with the EU will be, the final outcome is likely to fall somewhere between these two ends of the spectrum.
It added that the impact of the UK’s exit from the EU on the financial services sector in the UK will partly be determined by the agreements between governments and regulators on many pieces of legislation, and how firms respond to this shifting landscape.
The report stressed that settling the new general legal relationship between the UK and the EU and formulating more specific financial services regulations are complex tasks and will take time.
For the future relationship between the UK and EU for financial services to deliver mutual benefits to the UK and EU, the report recommended adhering to global norms; retaining current access to international markets; equivalence and grandfathering between the UK and the EU; orderly transition agreements; and on-going regulatory collaboration.
It added that failure to build sufficient transition arrangements, at both the end point of the negotiation of Article 50 and the implementation date of the new regulatory framework, could result in threats to growth, competiveness and financial stability as financial services firms need to change their operating models in order to continue to do business in a compliant way.
“It is in everyone’s best interests for there to be a positive outcome to the negotiations that is mutually beneficial to the UK and the EU, causes minimum disruption to the industry and benefits customers who have come to rely on the UK as a uniquely skilled and connected ecosystem for financial services,” Sants said.
The report added, “EU businesses have an interest in retaining access to the UK as an international financial centre, not only for the services provided directly but also as a conduit for global investment into the EU.
"The best outcome would recognise these dynamics and deliver mutually beneficial results for the UK, the EU and the rest of the world.”