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No-deal Brexit could decimate London market, EY survey suggests

5th August 2019 - Author: Steve Evans

In the event of a no-deal Brexit, which is currently seen as increasingly likely to occur, as many as 42% of financial services firms are considering moving their UK businesses to a new global centre.

BrexitA survey undertaken by global consultancy and advisory EY found that while the majority of financial services firms are anticipating that another extension to the Brexit deadline is the most likely outcome on October 31st, the threat of no-deal is being taken increasingly seriously and plans to leave the UK are being strategised.

Should the United Kingdom leave the European Union with no-deal on October 31st, the risk to financial services firms is that accessing European clients and partners becomes more difficult and as a result they are looking elsewhere.

EY’s survey found that 42% of financial services firms questioned say they will transfer UK business to a global centre outside the EU on Day 1 after a no-deal Brexit scenario occurs.

Imagine 42% of foreign insurance and reinsurance firms operating in the London market deciding to move their UK business to another global centre.

That could decimate the London market and dramatically reduce its importance on the global re/insurance stage.

John Liver, Financial Services Partner at EY, commented on the survey results, “Should the UK leave the EU without an agreement, the City will be less accessible to the EU than those global centres with equivalence status with the EU.

“Four in ten FS firms have said they will transfer business from the UK to a non-EU global centre if there is a no-deal exit, with 13% choosing New York/US, 6% Singapore and 3% Hong Kong.

“This is in addition to the operations and staff already moved, with EY’s latest Brexit Tracker finding around 7,000 jobs and £1 trillion of assets from FS will move from the UK as a result of Brexit.”

Now, we don’t for a minute believe that 42% would all move their business on the first day following a no-deal Brexit, but it’s certainly something to be aware of.

While the decimation of the London insurance and reinsurance market is actually unlikely, but worth considering as a worst-case scenario, it’s absolutely vital that those seeking to ensure the London re/insurance market’s place on the global stage do what they can to prevent such an exodus occurring.

Recently, the London Market Group (LMG) urged the UK Government to seek reinsurance equivalence under Solvency II regulations to guarantee London market firms continued access to the EU market after Brexit.

While the Association of British Insurers (ABI) underlined the importance of the new Government supporting the UK’s insurance industry and implementing an orderly Brexit.

Rating agency S&P Global Ratings recently warned that a no-deal Brexit outcome could have important long and short-term implications for the UK economy, which could be a key risk for ratings on UK insurance firms.

“Over half of FS firms think an extension is the most likely outcome come 31 October 2019, but a third now believe a no deal exit is the most likely outcome – and all firms recognise they need to continue to plan on the basis of a possible no-deal exit. Many firms have now established or built up presences where needed, but there is still a lot to do to ensure they can continue to serve clients smoothly and without disruption. Activity is now ramping up again as the new deadline looms,” Liver continued.

Adding, “A number of legal, operational and market risks around a no-deal exit continue to concern the industry. The biggest worry in a no-deal exit is around contract continuity and jurisdictional controls (29%). This reflects the fact that only in limited areas has Europe-wide action been taken to mitigate risks to contract continuity and therefore disruption to client services – firms are reliant on a patchwork of policies in individual countries, and need to understand and put in place controls to accommodate each individual country’s requirements.

“Market volatility was the next biggest issue for firms (20%), as firms recognise that they need to be prepared both to manage potential impacts of real economy difficulties that could be caused by a no-deal exit, and choppy financial markets. This is followed by concerns over capacity for heightened regulatory reporting (19%) as firms deal with ever increasing regulatory scrutiny in their existing markets as well as dealing with new regulators as they build operations abroad.

“Whilst immigration considerations feature in the list of top concerns, we were surprised this issue does not have higher profile. Many firms are relying on people having roles in both the UK and their EU27 country and potential restrictions on the type of work that business travellers can do need to be considered carefully with red lines kicking in from day 1 across most of the EU27.”

Even if the insurance and reinsurance sector is better prepared for a no-deal than the rest of financial services, which is possible given the importance of issues like contract certainty and access to the EU, an exodus of supporting financial services firms on the scale that EY’s survey suggests could still create significant challenges for the London market.

Overall though, the results show the real potential for London as a financial services hub to suffer a significant reduction in its stature on the world stage, if a no-deal Brexit is the outcome on October 31st.

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