BREXIT ANALYSIS – PRESENTED BY EDELMAN
EU REFERENDUM
23 JUNE 2016
MMO O N NT HTH S S
DAYS DAYS
Financial Services – Overview In the immediate aftermath of the UK’s ‘out’ vote, the most significant impact was on UK-listed financial stocks. The shares of Barclays, Lloyds Banking Group and Royal Bank of Scotland were the three biggest fallers when the UK market opened on Friday. There was a similar impact on the pound: it fell almost 7% against the dollar – a traditional safe-haven currency – on the news when it was first announced. The price of gold – another safe haven when investors are worried – jumped as the news became apparent. The reason for the dramatic impact on the UK financial markets is clear. Like it or not, London is the financial capital of Europe, and part of its pre-eminence has been built on the fact that banks, fund managers, insurers and others have been able to set up shop in the city but gain essentially free access to the rest of the European Union. This ability to ‘passport’ services into the rest of the EU is, at the very least, under threat as the result of a Brexit. Many financial institutions have already made plans to move parts of their workforce to other European financial centres in order to be able to continue to provide services to their clients, whatever the final result of the Brexit negotiations. Investors are braced for a period of selling as funds seek to meet redemptions in an environment where liquidity is likely to be low. No wonder the UK financial community was skittish on Friday. So much hinges on what the UK’s future relationship with the EU will look like that it is very difficult to say what the long-term impact will be on the UK’s financial services industry. If firms are able to continue to do business – to a significant degree – as now, it may be limited, and there would be no reason to see a serious reduction in the London’s reputation as a financial centre. If greater barriers are erected, then the impact could be severe indeed, and there could be an exodus of jobs and capital to Frankfurt, Paris, Dublin, Madrid or elsewhere. All hinges therefore on the skills of the
UK’s Brexit negotiating team, whoever they may be. Although Mark Carney’s initial response to the vote was to say that the Bank of England would assess the economic impact and risks over a period of weeks, it is not inconceivable that interest rates may be cut in short order and a recommencement of quantitative easing is also a possibility. However what currently seems to be being ignored by commentators is the impact on the financial sector in the rest of Europe. Although the UK market fell on the news, it was actually the best – or perhaps least-worst – performing large European stock market. Shares in Frankfurt and Paris fell significantly further. Shares in countries perceived to be weaker – such as Italy and Greece – fell even further. Investors appear to be betting that whatever the impact on the UK, the effect on the rest of Europe may be far worse. They may, for example, be betting that the rest of the European economies will suffer even more severely than the UK. Or even that it is the beginning of the end for the euro. It is far too early to say what the long-term impact on the UK or European financial services will be. With so much uncertainty, financial institutions will need to be flexible and prepared for a variety of outcomes. The markets, we know, abhor uncertainty. That old Chinese proverb: “May you live in interesting times” never looked truer. As we now move from the shock of the result to the process of finalising the UK’s future relationship with the EU, a number of pieces of regulation and legislation will be reviewed. It is therefore worth considering your organisation’s views regarding some or all of the Directives and Regulations impacting the financial services sector more broadly but also your sub-sector more specifically. This would include regulations as wide and diverse as Solvency II through to specific regulations such as the Mortgage Credit Directive.
Employee Engagement Leaders should act quickly to reassure their employees that – in the short term at least – it’s business as usual. After the predictions that were made in the run up to the referendum, employees may be concerned that a changing economic situation will have a negative impact on your business. There are two things you can say to help reassure them. Firstly, the best thing that every employee can do today and every day is focus on
customers. Continue working together to deliver brilliant products and services. Secondly, as leaders we’ll be monitoring the situation as it evolves. We’ll be making sure we’re on top of developments and steering our business to success. Regulations impacting the financial services sector more broadly but also your sub-sector more specifically. This would include regulations as wide and diverse as Solvency II through to specific regulations such as the Mortgage Credit Directive.
FURTHER INFORMATION Financial Services – Overview
Grant Clelland Senior Director, Corporate Reputation Edelman UK grant.clelland@edelman.com +44 20 3047 2073
Andrew WIlde Director UK Financial Smithfield, A Daniel J Edelman Company awilde@smithfieldgroup.com +44 20 7903 0661
Gurpreet Brar Managing Director, Public Affairs Edelman UK gurpreet.brar@edelman.com +44 203 047 2466
Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2000 | @edelmanUK