Without question, the UK’s financial services have been one of its strongest performing industries over the last 40 years.
The sector accounts for 12 per cent of income tax receipts, a net trade surplus of three per cent and provides 1.4 million jobs to boot. What’s more, the UK boasts the highest foreign direct investment (FDI) into financial services among any OECD nation, at 30 per cent of total inward FDI into the UK - equivalent to 17 per cent of the UK’s GDP.
Almost half of this FDI comes from European investors. For a country with the second highest current account deficit in the world, an industry which offers consistently high levels of revenue is undoubtedly a valuable asset.
It is commonly agreed that a vote to leave on 23 June could, therefore, have implications for the financial services industry and for the UK economy as a whole.
Same storm, different ships
But is that the whole picture? Research produced by S&P Global Ratings shows that some areas of the financial sector – particularly insurance and domestic banking – could be better placed to weather the impact of a vote to leave the EU.
UK based insurance firms, for example, are more reliant on trade with non-EU countries and receive relatively little FDI, so would be largely unaffected by trade disruptions with the European Economic Area (EEA) or a drop in investor confidence.
Domestic banks, similarly, have relatively little activity in continental Europe, and, aside from additional costs and the secondary effects of an economic downturn, would therefore be only marginally impacted by a leave vote. Therefore if you are employed in these industries a Brexit may ultimately mean business as usual to a large degree.
However, much of the overall activity of the City of London is international banking and non-EU banks typically make London their springboard for conducting operations in the EU.
At present almost one fifth of global banking activity is booked in the UK, foreign banks make up roughly 30 per cent of all UK banking assets on a resident basis, and are responsible for one-third of UK interbank lending.
To put this in perspective, that activity represents approximately 225 per cent of the UK’s overall GDP and a sizeable portion of the UK’s total commerce.
Border controls, City-style
If you are currently employed by a foreign bank that makes use of the UK’s ‘passporting Rights’ to conduct business across the EEA, the 23 June vote presents an extra level of uncertainty.
The loss of such rights for foreign banks could further encourage the centre of gravity in European financial markets to move towards Frankfurt, Paris or Dublin. As a result, there may be incentives for foreign banking groups to relocate some of their trading operations away from London.
Indeed, our research cautions that by ceasing to be an EU member the UK’s ability to house key pieces of financial infrastructure such as clearing houses could again be open to challenge.
Read more: London tops the global list of finance hubs
The European Central Bank (ECB)’s recent ruled that clearing of euro-denominated contracts should take place within the eurozone, which, fortunately for the City, was overturned by the EU General Court last year. A Leave vote could once again clear the path for another such ruling by the ECB.
Whatever the outcome on 23 June, the City of London can rely on a number of structural advantages to weather a possible downturn.
London’s middle time zone, for example, which has some overlap with Asia’s and America’s, facilitates international business with those continents. The City draws on a deep pool of international talent and the UK’s legal system has a long tradition of protecting property and creditor rights.
As encouraging as these industry fundamentals are, however, the issues that a Brexit presents to the UK’s thriving financial services should not be dismissed out of hand.