Post-Brexit fragmentation adds new costs and risks for financial services firms, new report finds

Wed 12 May 2021
Posted by: William Barns-Graham
Trade News

city of london

The European financial services sector has become fragmented due to the reduced access that UK-based firms now have to the EU market following Brexit, a new report has found.

This has led to increased costs and risk for firms that have had to set up new entities in the EU to maintain access.

Reduced profitability

The UK completed its departure from the EU at the end of the transition period on New Year’s Eve, but while it secured an agreement covering the post-Brexit trade of goods, little was agreed for services sectors including finance.

According to a report by Deloitte and IHS Markit, reported in Reuters, many banks that previously used London as a hub for serving the EU have left the city to open new hubs in the bloc.

“In many cases, UK entities have been left with reduced profitability and the new or expanded EU entities are struggling to develop viable business models and achieve sustainable profitability,” the report said.

Efficiency challenge

However, firms splitting portfolios between the UK and EU have seen capital requirements increase by between 8% and 51%.

"The challenge banks now face is how they can improve efficiency and achieve sustainable profitability across their European operations – and strike the right balance between what business they do in Europe relative to other global financial centres," Deloitte’s head of EMEA Centre for Regulatory Strategy, David Strachan, said.

Wall Street gains

According to City AM, the City of London has suffered a £2.3 trillion hit in lost derivatives trade in a single month, with Wall Street trading platforms benefitting.

US facilities pulled in more trades across euros, pounds and dollars in March while London experienced an exodus compared to last July.

EU destinations also gained, according to the Deloitte and IHS Markit report.

Post-Brexit story

The lost trades result from the EU blocking firms based inside its borders from using London derivatives platforms, pushing many into the US where they can continue to trade, reports Bloomberg.

“We are only at the beginning of the post-Brexit story,” said Strachan. “Brexit fragmentation has increased costs across banks’ European operations, at a time when the economic environment in Europe is already challenging.”

MoU

The UK and EU drafted a memorandum of understanding (MoU) on financial services in March. This will provide a forum for communication on future regulation which was not covered in last year’s UK-EU trade deal.

The UK continues to harbour hopes for a deal on ‘equivalence’ that would see UK regulation in financial services recognised as equally robust to that of the EU’s, allowing UK-based companies greater access to the bloc.

However, Politico reports that such a deal remains “highly unlikely in the near future”.