City figures are yet to be convinced by the benefits of Brexit three years down the line, but hold out hope that the government’s Edinburgh reforms could turbocharge growth in the sector over the next few years.
While the City has avoided a mass exodus of jobs and maintained its status as one of Europe’s premier financial centres, it has not seen the Brexit boost its backers promised.
“Brexit was hailed as the opportunity for the UK to break free from EU regulation and shake up its financial services industry,” John Legrand, a regional CEO of IQ-EQ and ex-Blackrock managing director said.
“But three years after the UK’s departure from the EU, the financial services sector has seen very little significant regulatory action that has helped our financial growth.”
Jerome Kemp, ex-head of futures and clearing at Citigroup and President of Baton Systems, went further, arguing that Brexit was slowly starting to degrade the City’s financial architecture.
“Brexit is really starting to bite on market infrastructure,” he said.
“Banks have set up EU entities, and these entities have been pushing risk back to their UK arms. This has significantly increased the complexity of the transaction lifecycle. An additional legal entity in the chain means that operational processes need to be much faster and more transparent.”
In December, Brussels proposed a draft law that would force banks in the EU to have an account with an EU-based clearing house to clear at least three types of euro derivatives.
This will decimate an industry already struggling with the effects of Brexit. According to Bank of International Settlements data, average daily turnover from interest rate derivatives fell to $2.6bn from $3.7bn in 2019. Euro area countries all saw big increases in the same period.
However, industry figures retained hope for the City when it came to the government’s Edinburgh reforms.
The reforms have been touted as one of the main Brexit dividends with some important parts of the reforms only being possible thanks to leaving the EU. For example, the government intends to scrap the cap on banker’s bonuses, repeal and replace Solvency II rules and a review of the MiFID II regime.
The government said this would potentially unlock £100bn of private investment in UK infrastructure.
Legrand also identified the replacing of the EU’s long term investment fund rules as a potential growth point in the future.
“A UK-focused long term asset fund regime (LTAF), will encourage financial services firms to invest in private assets,” Legrand said.
The LTAF is designed specifically to invest efficiently in long-term, illiquid assets. Many British funds investing in property froze during both the pandemic and the referendum vote in 2016.
The introduction of the LTAF should help facilitate an environment where investors that wish to invest in productive finance assets can do.
“This new, favourable funds regime will increase competition, drawing both UK and foreign fund managers alike back onto UK shores and bringing an increased pool of investors with them.”
“If these reforms are implemented successfully, it could be the start of the financial services Big Bang 2.0 that we have been waiting for and desperately need, and Brexit’s promises could become a reality,” Legrand said.