Brexit: How Is The Lingering Uncertainty Impacting Financial Institutions?
The Brexit fiasco has gone from a surprise referendum result to a political quagmire that has threatened to bring down U.K. Prime minister Theresa May’s administration and cast a pall over Britain’s future. With a third defeat for Mrs May’s withdrawal proposal, and a planned fourth vote on the way, there is no clue as to what an actual exit from the European Union (EU) will look like, apart from disorganized.
This extends a dark cloud over the U.K.’s short- and medium-term outlook, and it has already impacted the economy both in ways that are immediately clear, and some which may take a while to realize. Even so, perhaps one of the biggest blows Brexit has dealt, as well as the uncertainty surrounding it, is the dampner it has put on financial institutions in Britain.
While this isn’t to say that Britain is facing a mass exodus of financial institutions and a full economic collapse, the current status quo has already impacted the decision-making process for many businesses. Should the U.K. face a “No-Deal” Brexit, or worse, one with unfavorable conditions for the country’s economy, it may get even worse before it gets any better.
To use sporting analogies around Brexit, the ball is not so much bogged down in midfield, but under a foot of water and thoroughly sodden. And, in Britain – aka that one might dub the “Disunited Kingdom” or “Standalonia” right now – with all the talk about exiting the EU, a solution is needed pretty damned quick.
It’s like the England cricket team being 4-0 nil down in The Ashes against Australia and batting on a turning wicket to save the follow on in the last Test match – to avoid a 5-0 whitewash.
Lingering Questions Put Stopper On Future Developments
The current chaos surrounding Brexit – from the continued failed votes to the citizen petition that has garnered over 6 million votes – is having a chilling effect on financial institutions. For the sector, the uncertainty means that moving forward with any major development plans or investment is nothing short of a risky proposition.
With no clear framework for how cross-border transactions and interactions will be coordinated in the aftermath of any exit, the desire to take any risks is entirely absent.
Looking at Small Business Sentiment in the U.K., it decreased to -31 in the first quarter of 2019 from -18 in the fourth quarter of 2018 according to the data illustrated by Trading Economics. In terms of the historical perspective, Small Business Sentiment in the U.K. averaged -4.21 from 1978 until 2019, reaching an all-time high of 40 in the second quarter of 1983 and a record low of -69 in the third quarter of 1980.
One of the most immediate responses Brexit uncertainty has dealt is the migration of assets from the U.K. back to the EU. Earlier this year in January, for instance, Frankfurt Main Finance noted that it would be moving $800 billion back to Germany this year. That is on top of an estimated trillion dollars’ worth of assets that have already been relocated since Brexit was announced.
For major names in financial services, Brexit is not necessarily a bad thing, but rather a unique opportunity according to some.
Asaf Elimelech, CEO of trading platform Plus500, an international financial firm providing online trading services in spread betting and contracts for difference (CFDs) that is listed on the London Stock Exchange and a FTSE 250 Index constituent, has noted: “Brexit may be an unwelcome distraction in political terms, but it has been a fertile source of CFD trading opportunities for customers.”
He added: “Volatility in Sterling against both the Euro and the U.S. dollar has immediately followed the machinations of the process, with the recent House of Commons votes creating some fairly distinct gyrations that they can trade against.”
Mr Elimelech, who has a BA in Accounting and Economics (CPA) from the University of Haifa in Israel, also stated that his company remains “well prepared for the various Brexit scenarios, given its separate U.K. and EU licenses.”
Others have taken a more cautious approach to Brexit. Emerging trading platform EverFX, which recently became Sevilla FC’s official sponsor in Spain’s La Liga, for instance, was in the process of applying for a license from the Financial Conduct Authority (FCA) to operate in the U.K., but have slowed their plans.
According to George Karoullas, EverFX’s CEO: “The whole Brexit debacle has spread a feeling of uncertainty across all industries and economies in Europe, and the trading vertical exception. We consider the U.K. one of the most lucrative, interesting, and challenging markets in the world, and were thrilled at exploring what it has to offer.”
Since then, however, Mr Karoullas has noted that amid the uncertainty, “Brexit has temporarily paused our application process for the FCA license”, though it has not affected their long-term plans. He added: “Until the dust settles with Brexit negotiations, we are able to shift our attention to European markets that have already been very kind to us.”
What Else Could Go Wrong From Brexit?
Indeed, Brexit is wreaking havoc on capital markets. According to Max Tsaryk, CEO of recently established crypto trading platform Monfex: “High political uncertainty, fueled by successive failures to reach a comprehensive Brexit proposal in Parliament, and the absence of political leadership in the U.K. contribute to our expectation that the U.K.’s financial markets will continue a downward spiral.”
Mr Tsaryk also noted that the FTSE 100 “declined by 12.6% in 2018 [and] even though the index’s value has adjusted upwards in 2019 year-to-date, we expect a downward trend to continue in 2019 given the flat dynamics of macroeconomic indicators.”
Tsaryk also observed that the U.K.’s 10-year government bonds have been steadily declining over the week before last, down from 1.19% to 0.96% week-over-week. According to him “this indicates that investors are closing their long position in Pounds Sterling and U.K. equities, and fleeing into-risk free assets due to high market uncertainty.”
Another major issue facing the financial services industry apart from licensing issues in two separate jurisdictions – something many firms already accomplish anyway – is firms that have been employing the EU’s “passporting” system will no longer have that option available. The system allows EU firms to have a single license in an EU country and apply it across the region’s Single Market without further approval hurdles.
Although a regulatory equivalence has been discussed, it still relies on too many factors to be a real solution some industry pundits have ventured.
The model would have European Commission judges determine whether an existing license matches the EU’s regulatory framework in both intent and outcome. And, most importantly, such an equivalence can be revoked with just a month’s notice.
For financial firms that need to plan months, and even years in advance, 30 days is simply unacceptable to many market participants and the industry at large.
Meanwhile, major corporations continue to emigrate to the safer, more stable pastures in the EU, much like Bank of America’s $400 million move to Dublin and Paris.
For a sector that in 2018 was responsible for nearly 12% of the country’s gross domestic product (GDP) and accounted for nearly 50% of the U.K.’s trade surplus in services, such uncertainty is momentous and can have far-reaching consequences.
It remains to be seen how Mrs May’s administration will proceed. With a complete lack of confidence from the House of Commons (as evidenced by three straight defeats of her withdrawal proposals) and increasing calls for her resignation – apart from battling her own Cabinet – she seems to have little political currency left to deliver a realistic solution.
As the quagmire endures – and amid a water leak early this April in the House of Commons chamber – this lack of political capital may mean that the sectors most affected by Brexit are those that are absolutely vital for the country’s overall well-being.
With all the madness going on around Brexit and the inability of politicians to get a grip and agree on a way forward, perhaps one might think that the best advice, as extolled by Lord Adonis, a Labour peer who served in the Labour Government for five years (under Prime Ministers Tony Blair and Gordon Brown), would be to “stay in the EU.”
This, according to Adonis, who was chairman of the National Infrastructure Commission in 2017, would safeguard British jobs and resolve questions over Ireland and the vexed question of the Irish backstop.
And, of course if Britain actually has a second referendum or a “People’s Vote”, which many have been calling for, the madness is unlikely to stop there. A petition to revoke Article 50 and remain in the EU has to date been signed by over six million people. It may need to go much higher than that though.
Whatever else, the whole Brexit impasse has gone some way to tarnishing Britain’s reputation internationally and made some believe – like New York columnist Thomas L. Friedman – that the country “has gone mad.” Others around the globe have remarked that things have gone from a “bad joke” to a “banana republic.” Quel dommage!