Stefano Fugazzi (ABC Economics) – Last February the Financial Times published a piece where it assessed the potential impact of Brexit on the so-called “City”. London hosts some 250 foreign banks employing 160,000 people and financial services account for a fifth of the UK’s GDP.
Britain is also a driving force behind the creation of the capital markets union as the European Baking Authority, the EBA, is headquartered in the heart of the City.
According to the Financial Times (“City fears loss of access and influence in event of Brexit”), five are the sectors which may suffer the most from an exit from the EU, with concerns particularly over matters regarding the regulatory and tax regimes whilst the UK negotiate a new deal with the Union (see Article 50 paragraph 2 of the Lisbon Treaty: Link: https://abceconomics.com/2015/05/30/brexit4). These are:
- Asset management
The UK-based fund management industry accounts for a third of all the assets managed in Europe. A key to the growth of this industry has been UK companies’ ability to “passport” (i.e. sell) their funds into Europe as members of the EU. Brexit would raise questions about the ability of UK-based groups to sell retail funds elsewhere in Europe.
- Hedge funds
UK hedge funds would also be unable to passport their funds into the EU. However, the impact would not be too big because London-based hedge funds largely raise money from investors outside the bloc. A key area that would not change for hedge fund managers relates to restrictions on short selling and certain aspects of credit default swaps that have been subject to regulation since the financial crisis. This is because the rules relate to where the stock or instruments are listed, rather than where the fund manager is based.
Europe’s insurance market is very domestic and there is not a developed single market. It is thought Brexit would have little direct or immediate impact on the UK’s insurance industry, which has a £2.8bn trade deficit with the EU.
- Private equity
As with hedge funds, European investors are not a large contributor of funding to UK private equity managers. The biggest impact of Brexit on private equity would be in the area of venture capital.
- Trading and settlement
London is one of the world’s hubs for the vast $700tn market for over-the-counter derivatives, financial instruments that were blamed for exacerbating the financial crisis.
International rules will ensure more of this bank-dominated market is managed through clearing houses, with the aim of reducing risk.
If Britain left the EU, the European Central Bank could increase pressure for more direct oversight of all euro-denominated swaps that are currently cleared through UK-based clearing houses.