Delivered on Christmas Eve and coming in at more than 1,200 pages, the long-awaited Brexit deal offered very little in the way of treats for British businesses. But for trading and industrial companies it provided at least a smidgeon of certainty – even if it was only that business with the EU will almost certainly be more difficult.
The agreement may or may not have been better than no deal, but it left nothing under the tree for what is arguably the UK’s most important industry: financial services. In the rush to get a deal together before the clock ran out on the transition agreement – and to minimise the time TV channels spent showing footage of lorries queuing outside Dover – essential questions about huge chunks of the economy went unanswered.
Investment Monitor: Assessing Brexit’s impact on financial services Part of New Statesman Media Group
The services sector got short shrift in the agreement. Yet services are the lifeblood of the UK economy, responsible for two-thirds of GDP, and the EU is the main export market for them. Government figures show 39 per cent of the UK’s total service exports (£123.7bn) went to the EU in 2019. Six of the top ten countries to which the UK exports services are based in the EU (France, Germany, Ireland, Italy, the Netherlands and Spain). In financial services alone, a third of exports go to the EU.
Foreign direct investment (FDI) in the UK is dominated by services. Service-based investments made up 63 per cent of the money invested in the UK by companies based in other countries in 2019-20, while financial services alone accounted for nearly 8 per cent of both FDI projects and new jobs via FDI, according to government figures.
Despite their outsized importance to the UK economy, financial service companies still lack clarity about future access to the EU market. Meanwhile, professional services companies such as law and accounting firms face their own continuing uncertainties over issues such as data-sharing regulations. The ultimate fate of the City of London hangs in the balance.
Investment Monitor: What now for the UK’s financial services? Part of New Statesman Media Group
The City has already been damaged by the decision to leave the EU, and every day of continued uncertainty harms it further – an effect amplified by the chaos of Covid-19. The lingering uncertainty is detrimental to not only domestic firms but also the ability to attract, and retain, the presence of the foreign companies that have flocked to London in recent decades. Research by Investment Monitor shows the UK is host to 1,984 subsidiaries of global financial services companies, over 900 more than its closest European rival, Luxembourg.
There has been no mass exodus, but investors have been forced to start hedging their bets. In 2017-18, the years following the Brexit referendum, FDI in UK financial services dropped by 14 per cent. The number of new jobs in the industry has been declining at a higher rate, falling 26 per cent in 2018-19 with a further decline of 19 per cent in 2019-20. Retention is an urgent problem: the number of “safe” jobs fell by 94 per cent in the latter period, indicating an inability to prevent companies from moving operations abroad. In 2019, financial services FDI in London hit a five-year low. According to EY’s financial services Brexit tracker, as of the third quarter of 2020 more than 400 UK financial services job relocations to Europe had been announced. This takes the total number of financial services jobs leaving the country since the Brexit referendum to more than 7,500.
Investment Monitor: What does the Brexit deal mean for investors? Part of New Statesman Media Group
While London has a lengthy list of attributes contributing to its success as an international financial centre, its embedded position as a European hub and the seamless flow of people and capital between the UK and its EU counterparts was among them. With that now lost, or at least greatly diminished, the extent to which this access is either restored, or largely restricted, is critical to the City’s future, and that of the UK as a whole.
Like a child begrudgingly accepting a bad gift from a distant relative, the financial services industry greeted the Brexit deal as politely as it had to. “The successful conclusion of these negotiations will be greeted with relief by businesses in all parts of the UK and Europe. We congratulate the negotiators for getting this deal over the line,” commented Miles Celic, chief executive officer of TheCityUK, a group representing financial services and related industries. “While a deal is welcome, financial and related professional services are clear-eyed about the need for both sides to continue to develop the relationship in services in the years ahead.”
Boris Johnson himself admitted that the deal “perhaps does not go as far as we would like”. Negotiations are ongoing, with a stated aim of reaching a framework agreement on financial services by March 2021. The stakes for the UK economy could not be higher, and the potential for disappointment is enormous. If the long-awaited Christmas gift isn’t to be delivered until March, it had better be a cracker.