The decision by the United Kingdom to leave the European Union is expected to have a very profound impact on the financial markets and economy of both the UK and the rest of the EU members. ‘Brexit,’ as its commonly referred will disrupt the financial markets both in the long term and the short term. The UK served the EU a notice of withdrawal from the EU under Article 50 of the treaty on the European Union (Leitner & Frauendorfer, 2017). This began a two year notice period, and this triggered the introduction of the European Union withdrawal Bill to the House of Commons on July 2017 (Whyman & Petrescu, 2017). The agreement in place is that by December 2020, the UK should exit the single market and customs union. This means that the UK goods and services will not be able to enjoy free access to the European market. This change is expected to have a huge impact on the financial markets in the region.
Disruption of financial markets in this region is likely to impact other economic factors. It is therefore important that all crucial players in the financial sector in the UK prepare adequately for Brexit. This will help this organization to minimize the negative impact of Brexit and hence ensure the stability of the financial markets both in the long term and in the short term. Financial institutions that are likely to be affected by Brixit include Investment banks, capital markets, insurance market and mortgage institutions (King, 2016). The paper discusses the function of the listed financial institutions and discusses the government policies that govern the financial markets and how they will be affected by this change. In addition to this, the paper also identifies and discusses other contemporary issues arising in this industry. This paper researches and analyzes the potential short term and long term impact of Brexit and provides a recommendation on how the Bank of England and the Financial Conduct Authority should prepare for Brexit.
Financial institutions play a very huge in the financial markets and the economy of any country. They make transactions easy and convenient, and others provide credit and insurance services to the general population. Banks are one of the oldest and most important financial institutions. Banks in the UK and the EU, in general, will be affected by Brexit to a very great deal. Some of the roles that banks play include; accepting deposits from clients, offering advances and other credit facilities, acting as an intermediary when carrying out payments (Schoenmaker, Et Al. 2016). Investment banks offer investment funds and financial advice to business institutions, and they also offer property management services. Following the Brexit vote, the EU commission issued a notice to the stakeholders in the financial sector outlining some of the legal consequences of Brexit on banking and payment services. According to the European Banking Authority, The minimum requirements for own funds and eligible liabilities had to change. This means that authorization for banks in the UK could become more difficult for banks from outside the UK. The banks that are currently operating in the UK but are registered in other countries will find it difficult to get authorization to operate within the UK. The UK is currently Europe`s major international financial capital center and its the leader in cross-boarder lending.
Banks in the UK will, therefore, be affected by the new rules after Brexit. It will become more difficult for the banks that are based in UK countries to lend to banks located in other countries within the EU. This means that the banks are going to lose a significant amount of revenue that they accrue from trading with other banks in the region. The banks in the UK will also have to undertake a significant review of operations and structure to adapt to the new rules and regulations as a result of Brexit. For example, the banks which are headquartered in the UK will need to evaluate whether it’s tenable for them to maintain the headquarters in the country or they should shift to another country(Caporale, Gil-Alana and Trani, 2018). Some banks with headquarters in London such as HSBC decided to retain the UK as its headquarters. The banks will end up incurring huge costs which could lead to huge losses for the banks. The banks that will remain in the UK will find it difficult to access other word markets. This is because, presently UK banks access to world markets through the Free Trade Agreement(FTA) made by the EU with other countries (Verhofstadt, 2016). The exit of UK from the EU will, therefore, mean that the UK will no longer be a signatory to the FTA”s on financial services.
Additionally, Brexit will affect trade reporting and clearing requirements. Under the European Markets Infrastructure Regulation(EMIR), banks in member countries are subjected to comprehensive rules concerning clearing, trade reporting, and mitigation of risk. The exit of UK from the EU will, therefore, mean that banks that remain in the UK will not be subject to this regulations.
UK banks that currently provide custody services to clients will be incapable of providing these services once they leave the UK. The Alternative Investment Fund Managers Directive(AIFMD) restricts the organizations that can act as a depository for AIFs that are incorporated in the EU(Hellwig, 2017).
The Insurance Industry in the UK is huge, and London is a global hub for the Insurance sector serving both local and international markets. Brexit is expected to have a huge impact on this sector. This is because Brexit will mean the exit from common financial services market of which Insurance is a major industry in this market. One of the potential impacts on the Insurance industry is the cancellation of the existing Insurance policy after the expiry of the transition period in March 2019. There is a high likelihood that people in the UK who have insurance policies with companies that are not incorporated in the UK will lose their insurance cover. This is the same with the people in EU with insurance policies with companies incorporated in the UK. This would, therefore, mean millions of individuals and businesses would, therefore, lose their insurance cover.
Brexit is expected to lead to passport loss especially for non-EU firms seeking to access the European Insurance market. If the EU withdraws a passport for UK insurers, the companies will be forced to restructure their business. This will, for example, mean incorporating another company in EU countries or entering into a partnership to access this markets. This will cost the insurance company a lot of money and hence affect their revenue flow.
Brexit is also expected to increase capital volatility since the insurance companies in the UK will not be regulated by Solvency 2. New rules that will be set are expected to cause market volatility due to uncertainty over the future. In addiction to this, Brexit is expected to affect the taxation of insurance companies both in the UK and in EU countries. Brexit will mean that UK incorporated insurance companies operating in the EU will be subjected to high taxes since they will not get special treatment as before(Hohlmeier and Fahrholz, 2018). Presently, taxation of companies across the EU members is favorable due to the EU common market agreement. Brexit could also bring about additional withholding tax on dividends and payments from operations in other countries. Increase in tax will reduce profit margins for the companies.
Human resource problem may also arise as a result of the change. Companies might be forced to hire additional staff to support operations outside the UK. This situation may also force the companies to transfer staff from the UK to streamline operations in other locations. This may bring about some instability for the UK based insurance firms.
The trading of shares will also be affected by the exit of UK from the EU. The companies that are listed in the London stock exchange and are not incorporated in the UK are expected to be affected the most. After Brexit, it will be difficult for companies that are incorporated in EU to raise capital in the UK since the movement of capital will be more restricted. In addiction to this, companies in the UK will have different regulations and different regulatory bodies(Howarth and Quaglia, 2017). The regulation under the Markets in Financial Instruments Regulations(MiFIR) will not apply to UK companies. This will make it difficult for companies from the UK to access capital from other countries outside the UK. Consequently, this will limit the expansion and growth of different companies outside the country.
The Bank Of England(BOE) is the central bank of the UK and a model upon which most central banks in the world are built. The primary function of BOE is to maintain monetary stability and oversee monetary stability in the financial systems of the United Kingdom. (Moloney, 2017) The Financial Conduct Authority(FCA) is a government body that regulates the financial organizations providing services to consumers in the UK. It also maintains the integrity of the financial market in the UK. With Brexit now a reality and the impact that it is expected to have on the financial market, it is important for both the BOE and the FCA to design policies and take measures that will help to minimize the impact of the impending change. The following are therefore the recommendations on actions that should be taken by the BOE and the FCA to prepare for Brexit.
One of the recommendations for the BOE is trying to balance inflation, aggregate output, and unemployment to maintain stability in the economy. This will be done by closely regulating interest rates to ensure that they are not too high to bring in inflation (Halligan & Lyons, 2017). Most investors are jittery on Brixit, and most markets are performing poorly because of the uncertainty. Lowering the interest rates slightly will encourage investors to borrow money, and hence the economic activities are expected to increase and hence to minimize the impact of Brexit.
The BOE should ensure that there is enough money in circulation to avoid the happenings of 2008 recession. One of the ways to do this is to reduce the amount of money the central bank holds for commercial banks. The interest rates should also be increased to ensure that there is enough money circulating in the economy.
The BOE and the FCA should also negotiate with European Union Financial regulators such as the European Banking Authority(EBA) and The European Securities and Markets Authority(ESMA) to ensure a smooth transition for players in the financial services industry(Wymeersch, 2018). By carrying out these negotiations, it will be possible for the BOE to sign agreements to enable the UK financial services providers to access the EU market with relative ease.
The BOE and FCA should design new rules and regulations to regulate the financial sector in the UK. This will help in filling the gaps in legislation left after the exit of the European Union. The roles and responsibility that were being carried out by EU organizations have to be transferred to new authorities in the UK. In addition to this, the BOE and the FCA should negotiate a deal that will enable firms and FMIs to continue treating UK firms preferentially under the Capital Requirements Regulations regime (Alexander, 2018). This will ensure that there is no disruption in capital flow within this region.
I would also recommend the amendment of Rule 2.1 of the Contractual Recognition of Bail-In Part of the PRA Rulebook to ensure that the regulation does not apply in respect to the EEA law governed liabilities created after the exit.
Conclusion
The exit of UK from the EU is expected to have a great impact on the financial services industry in the UK. Some of the industry players that will be greatly impacted by the Brexit include; banks, insurance companies, and the stock markets. This report investigates the potential impact that Brexit will have on these institutions as well as the market in general. The study is carried out using secondary data from various sources such as journals, newspaper articles, government publications, and internet sources. The paper also discusses the role of the BOE and the FCA and proposes recommendations on how the impact of Brexit on the financial services industry can be controlled. The BOE and FCA have to design new regulations to govern financial services providers in the UK to cover the loopholes left about by the separation from the EU. The BEO should enforce fiscal policies that will help to prevent recession of inflation depending on the prevailing economic environment at that particular time.
References
Alexander, K. (2018). Brexit And Financial Services: Law And Policy. Oxford, Hart Publishing.
Caporale, G., Gil-Alana, L. and Trani, T. (2018). Brexit and Uncertainty in Financial Markets. International Journal of Financial Studies, 6(1), p.21.
Halligan, L., & Lyons, G. (2017). Clean Brexit: Why Leaving The Eu Still Makes Sense–Building a Post-Brexit Economy For All. London, Biteback Publishing. Retrieved:4/12/2018Http://Public.Eblib.Com/Choice/Publicfullrecord.Aspx?p=5046625.
Hellwig, H. (2017). The Effects of Brexit on the Law of Companies and Financial and Legal Services in Europe: A Summary Overview. European Company and Financial Law Review, 14(2).
Hohlmeier, M. and Fahrholz, C. (2018). The Impact of Brexit on Financial Markets—Taking Stock. International Journal of Financial Studies, 6(3), p.65.
Howarth, D. and Quaglia, L. (2017). Brexit and the Single European Financial Market. JCMS: Journal of Common Market Studies, 55, pp.149-164.
King, M. A. (2016). The End Of Alchemy: Money, Banking, And The Future Of The Global Economy.Upper Saddle River, NJ: Pearson Education.
Leitner, P., & Frauendorfer, K. (2017). Brexit – The Economic Effects On The United Kingdom.Cheltenham: Edward Elgar Publishing.
Schoenmaker, D., Et Al. (2016). European Banking Supervision The First Eighteen Months.Oxford, Hart Publishing.London.Simon and Schuster Publishers
Verhofstadt, G. (2016). Europe’s Last Chance: Why The European States Must Form a Perfect Union. New York, Basic Books.
Whyman, P., & Petrescu, A. I. (2017). The Economics Of Brexit: a Cost-Benefit Analysis Of The Uk’s Economic Relationship With The Eu. Available at:Http://Public.Eblib.Com/Choice/Publicfullrecord.Aspx?p=4980396.
Wymeersch, E. (2018). Third-Country Equivalence and Access to the EU Financial Markets Including in Case of Brexit. Journal of Financial Regulation.(5) 1 Vol pg 67
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