Finance

The City and Brexit: 4 unknowns if the UK votes to leave the EU

The first referendum on Britain leaving the European Union was in 1975. Actually, it was pre-EU times. The electorate voted 67.2% in favour of staying in the European Economic Community.

Recent opinion polls suggest a much closer margin as the June 2016 referendum approaches. The potential effects of a British exit from the EU is a cause for concern for many businesses. Particularly for finance professionals.

 

1. Changes to tax regulations

EU regulations on UK businesses have been a sore point for a long time. Many accuse Brussels of hampering UK businesses with unnecessary bureaucracy. The Centre for the Study of Financial Innovation (CFSI) surveyed the finance sector for their views on Britain, the EU, and Brexit. Over two-thirds of respondents highlighted that the Government appears to ‘gold-plate’ EU legislation. The report notes that over the years the UK has been far from blameless when transposing EU rules into UK legislation, which puts UK firms at a competitive disadvantage. [1]

Whoever's to blame for EU-imposed legislation, leaving will likely mean more regulatory freedom. The number of subsidiaries necessary to continue trading in Europe without access to the EU’s Single Market might be offset by fewer admin demands from tax reporting.

 

2. New trade and business laws

Lifting EU regulations on financial organisations could lead to London’s financial institutions being deemed ‘not quite right for mainstream business’[1]. This would lead to a loss of confidence, worsened by the UK losing political capital by backing out of the EU.

There could be a large impact on businesses working with non-UK partners. These partners currently enjoy the freedom to directly deliver cross-border products and services. The UK's exit could reduce or even end this.

However, if the UK left the European Economic Area (EEA), it wouldn’t be subject to external tariffs on goods and services entering that area. This could give UK businesses more trading freedom. It could also reduce domestic demand by introducing cheaper imported services.

 

3. Trading outside the EEA

There are concerns that the UK could face punitive measures. This could be for political reasons or to stop the UK from becoming a competitor of the EU in certain markets.

The UK would need to establish strong access to and interaction with non-EU markets if it left the EEA. Wealthy and influential Asian countries, like China, could become attractive markets for the UK.

 

4. The future of London’s financial institutions

London’s status as the financial gateway to Europe might be the biggest unknown. The main concern is the loss of ‘passporting’ rights for financial services in the EU. Currently, a firm authorized in an EEA state can establish branches and/or agents in any other state. It can also provide cross-border services.