Impact on Financial Services
[Updated on 11 October, 2016]
The result of the EU referendum has shaken confidence in the global financial markets, adverse effects have been observed and until details clearly emerge as to what the next steps will be for the UK this uncertainty will continue.
Since the results became known on Friday 24th June we have observed; the pound falling to a 31 year low against the dollar and significant falls against most other major currencies; UK and European Stock markets have seen significant falls as well with the FTSE 100 crucially falling below the psychologically important 6,000 mark for the first time on Monday, 27th June. The FTSE 250, a better indicator of the health of UK businesses than the more global FTSE 100 fell even more sharply, closing 7% lower on Monday than its previous low on Friday. This means that more than 60bn pounds have been wiped off the value of the top 350 biggest listed companies in the UK. The banking and property sectors have borne the brunt of the falls as investors singled out these industries as the ones most likely to hit by leaving the EU.
In addition to volatility in the currency and equities markets, rating agency Standard & Poor’s stripped the UK of its top AAA credit rating after the vote to leave the EU. This represents an additional blow to the economic standing of the UK since the referendum and will result in borrowing costs of the country increasing as lenders perceive the UK as less creditworthy.
Mark Carney, governor of the Bank of England, has publicly confirmed that the Bank of England is prepared to support this period of market and economic volatility by being ready to provide additional liquidity, in the region of 250bn pounds through existing liquidity facilities. [Source: Brexit – A Turning Point, Sky News]
More detailed information on the impacts to the financial services sector can be found from our members here:
The derivatives market is an important market to the UK, and although we expect that the UK Government will be keen to ensure that many of the protections for derivatives transactions remain in place, and that the UK can continue to benefit from any cross-border arrangements. However, we also believe that every business should prepare and be ready to engage with Government to shape the impact of Brexit on their market.
The UK may decide to use continuity legislation to avoid a legal vacuum so that EU rules relating to financial services continue to apply in the UK for the time being post-Brexit. Maintaining equivalent rules would assist the UK in establishing that it satisfies “equivalence” standards that may be applicable. Read more>>
Herbert Smith Freehills
It seems extremely unlikely that EEA insurers will be unable to access the UK insurance market post-exit. The precise terms on which they will be able to conduct cross-border activities will depend, however, on the outcome of negotiations between the UK and the EU and on requirements for reciprocity agreed in that context. Read more>>
As the host of the largest insurance Industry in Europe and the third largest globally, the impeding event of Brexit poses enormous considerations for British insurance providers, although these effects vary widely based on the type of provider. For General insurers, the loss of the single EU passport poses a threat to unimpeded access to the single market, staff and cross border transactions; although there is also the opportunity to benefit from a weaker pound. For specialist insurers who have a more global audience, largely in North America, the loss of the “single passport” does not pose a risk, although the fall of the pound against the USD has considerable complications. Nonetheless, the process of Brexit does not formally begin until “Article 50” is activated and formal negotiations on a post-Brexit agreement starts, which may produce a number of outcomes. This will likely take several years to complete, which for the time being will ensure business as usual continues for insurance providers and no change to EU rules. However, during this time significant uncertainty will continue which may hamper investment prospects and economic outlooks.
Moreover, even in the event of Brexit, financial services will continue to remain a key element of the UK economy and a dramatic policy shift is unlikely- However, insurance companies are recommended to create contingency plans and carefully observe potential outcomes, reviewing their cross border strategies whilst checking the impact of Brexit on their capital adequacy, their liquidity and their access to funding in case of potential capital flights. Read more>>
Simmons & Simmons
Brexit is anticipated to bring enormous challenges to Banking in the United Kingdom, especially with uncertainty surrounding the financial relationship between the UK and the EU in the picture of current regulations. London is the world’s leading financial centre and according to Simmons & Simmons, British Banking benefitted from an EU scheme known as the “single passport” which permitted banks to register in simply one member state to have access to the entire union. In the event of Brexit, this agreement may be made redundant and banks may be forced to register in each EU state individually, posing a potential threat to UK jobs and firms- some whom have already spoke about relocating jobs to the continent. Read more>>
St James’s Place: Brexit – A Turning Point
St James’s Place Wealth Management in its article, Brexit – A Turning Point, provides investment expert views of the immediate fall out from a financial markets perspective. The article goes on to explain that, in the short term, volatility and uncertainty will remain however looking back on similar financial events such as the 2008 financial crisis indicate that markets will stabilise and investment opportunities remain and are necessary to ensure long-term financial security. Read more>>
Clyde & Co: Impact to Insurers
Brexit would have significant regulatory implications for insurance industry participants (whether based in the UK or elsewhere in the European Economic Area (EEA)) and result in a lengthy period of considerable uncertainty while negotiations were undertaken over the terms on which it would take place. It would also have potentially serious short and longer term consequences for industry participants (particularly but not exclusively those based in the UK), the nature and extent of which would depend considerably on the nature of post-Brexit UK access to EU markets (and vice versa). In this note we examine these regulatory implications and consequences and comment on some associated risk management actions that industry participants could take, both in the run-up to the referendum on 23 June and in the event of a vote to leave. Read more>>