No-Deal Brexit: Financial & Banking System

After a long battle of referendums and rejected legislations, on 31st January 2020, the United Kingdom finally left the European Union, bringing an end to a 47-year old membership. The departure also marked the start of an 11-month ‘transition period’ ~ in which the nation remains a member of the single market and customs union, while undergoing negotiations with the EU to strike a free-trade deal, but not having any voting rights on the union matters. The U.K. government has set an ambitious deadline of the 2020 year end, up until a deal needs to be striked, or else it will be a ‘no deal’ scenario with the 27 nation bloc’s vast single market and the country will have to revert to World Trade Organization rules.

In case, no deal is reached before the end of the transition period, which is highly probable considering the pandemic and the continuous failed talks between both the parties, the EU will start treating the UK as a ‘third country’ i.e. not as a member state of the union but rather, on the terms of the trade agreements which it has set up with third countries.

Theoretically, this signifies introduction of certain tariffs and checks until a concrete trade agreement is reached between the two parties. The transition period could have been extended due to the ongoing pandemic but the UK Prime Minister Boris Johnson’s sheer persistence to leave the EU is making way for the UK to become a third country in the union’s eyes. 

There’s no second doubt to the fact that a  no-deal Brexit would be a major blow to the UK’s economy as the island nation’s 46 percent of the exports are dependent on the EU market. As per the United Nations, Britain risks losing 14% (an estimate of around $32 billion) of its exports because of this. The mounting trade costs due Non Tariff Measures (NTMs) and potentially rising tariffs would certainly bring more than double the adverse economic effects of Brexit on the UK, the EU and developing countries. 

The Union imports would become a bit more pricey due to tariffs, differences in regulatory regimes, currency devaluation and administrative costs. This could affect the manufacturing of composite products while also impacting upon the nation’s supply chains for UK businesses, who then export.

A no-deal brexit could see most of the banking and financial sector reallocate their resources to the EU nations as was seen in late 2019 over the uncertainty of the Brexit Deal. Understandably, multiple risks such as loss of business due to foreign-exchange fluctuations, exchange risks from currency translations, business reallocations and fewer import and export transactions due to the unavailability of single-market “passport rights” are attributable to this shift. This resources reallocation would further, have a crippling effect on the nation in the form of increased unemployment and future altering of the banks’ relationships with their customers within the EU as they shift from being “within the group” to “cross-border”, reshaping the business dynamics.

Additionally, a No Deal Brexit would sabotage the UK’s agreements as a large part of the nation’s trade treaties, including financial  deals, with over 60 non-EU countries are conducted through the union, insinuating delay in businesses until new agreements are reached between the parties.

According to the EU, British banks, insurers and asset managers would face the same limited kind of access given by the bloc to the United States, Japan and Singapore but Britain wants binding commitments from the EU on financial-market access to avoid the country’s finance industry suddenly being cut off from the bloc, which is a major export market for British financial services. The British businesses would have to additionally spend £15bn extra a year on paperwork in such an event.

Regardless of a deal or no deal, the nation has come up with several safeguarding measures for the financial and the banking sectors. An onshoring process has been finalized which involves converting directly applicable EU law into UK law and granting UK authorities and regulators the necessary powers to ensure as smooth a transition as possible. Even though UK-supervised organisations operating within the nation will be given some time to adjust to onshoring changes, they will have to comply with new requirements ‘from day one’ in certain key areas. The UK has also come up with a Temporary Permissions Regime (‘TPR’) for inbound EU organisations and investment funds. Entities that enter the TPR will be able to continue their regulated activities in the UK for up to three years while they work towards obtaining the appropriate regulatory permissions. This will significantly minimise disruption for EU organisations operating in the UK. 

At this instant, the ongoing pandemic situation and the uncertainty over the EU-UK talks unquestionably provide for a bleak future for the EU’s financial and the banking system.

References –

1. https://www.bbc.com/news/uk-politics-32810887
2. https://www.euronews.com/2020/06/11/brexit-draft-deal-first-of-many-hurdles-to-a-smooth-exit
3. https://in.reuters.com/article/us-britain-eu-finance/step-up-your-no-deal-brexit-plans-eu-tells-banks-in-britain-idINKBN2332GW
4. https://www.express.co.uk/news/politics/1297934/brexit-news-transition-period-no-deal-WTO-terms