The announcement on 24 June 2016 that the British public had voted in favour of leaving the EU caused considerable panic in financial markets. The pound fell by 10% within moments of the result being announced, hitting levels not seen since 1985. Shares on the FTSE 100 also tumbled by 8% shortly after the result. 

The day before, markets had surged after polling data suggested that voters were going to hand victory to the Remain campaign. Sterling saw its best day in eight years, trading above $1.47, having spent the previous few days swinging wildly as uncertainty over the outcome reigned.

Leading up to the vote, many of the Remain camp warned that EU negotiators would seize on Britain’s apparent retreat from the world by attempting to capture much of its most successful industry: financial services. 

Mathilde Lemoine, group chief economist at Edmond de Rothschild, told the BBC in June: “If the UK leaves the EU, [London clearing house LCH.Clearnet] dealing with euro transactions will relocate to the eurozone and therefore many foreign banks, European banks and also non-European banks will relocate to the eurozone.”

Last year, the European Central Bank (ECB) tried to ensure euro transactions were cleared in the eurozone instead of LCH.Clearnet, although these efforts were later quashed in court after a challenge from the Treasury.

However, LCH.Clearnet remains one of the most important clearing houses in the world, with its subsidiary SwapClear servicing around 50% of all over-the-counter interest rate swaps. The clearing house is also second only to the US’s Depository Trust & Clearing Corporation (DTCC) in terms of how many bonds and repos it clears globally, working across 13 government debt markets. 

While financial markets did take a significant hit after the result was announced and the subsequent resignation of Prime Minister David Cameron, the FTSE 100 and pound have stabilised since. Indeed, within a week all of the FTSE 100 losses had been erased and shares were back trading at a two-month high of 6360. When Theresa May was confirmed as Cameron’s successor, markets surged, with the pound pushing above $1.30. By the middle of August, rating agency Moody’s said it didn’t expect Britain to enter into a recession over the coming year.

Despite the referendum result, London continues to be the centre of global services, thanks to a world-class legal system and a vast array of financial services.

The UK’s financial services industry has successfully negotiated other major events in its history, such as the period of deregulation that the City underwent during 1986, known as the Big Bang.

The infrastructure and systems that underpin the UK’s economy will not be disappearing anytime soon. The UK’s education system is still the envy of the world, despite what the domestic press might say. According to research by global university ranking guide QS Top Universities, the UK had four of the top universities in the world in 2015. The UK also had the second-highest proportion of universities in the total list, with 71. 

Our universities attract students from across the globe, and in particular countries like China and India. Indeed, the UK saw 58,810 Chinese students attend its universities in 2014, compared with just 27,364 students from China attending German universities in 2012 (the last year data is available). 

To help ensure this continues, the Government is committed to supporting the UK’s world-class academic research, with new Chancellor Philip Hammond announcing in August that UK businesses and universities “will have certainty over future funding and should continue to bid for competitive EU funds while the UK remains a member of the EU.” The Government says it will underwrite existing grants that universities and research institutes receive post-Brexit. Currently, around £1bn is given to universities and small businesses in the UK by the EU for research purposes. 
The US accounts for 49% of UK financial services FDI stock and 19% of UK professional services FDI stock The UK is also home to some leading financial institutions. Lloyd’s of London is one of the most unique insurance markets in the world, offering specialist commercial insurance to companies from across the globe. As Lloyd’s points out, the London insurance market controls more than £60bn of gross written premiums and is the largest hub for commercial and speciality risk in the world. Made up of 350 companies and employing more than 48,000 people, it accounts for over 20% of the City’s GDP.  

Inga Beale, chief executive of Lloyd’s, says: “Lloyd’s relationship with Europe goes back decades and it is one built on the expertise and quality underwriting that the Lloyd’s market provides. There is a depth of knowledge and understanding that is not easily replicated elsewhere and I have no doubt that there will be an appetite for customers to be able to access the market after the UK has formally left the EU. 
Keep on course for MiFID II
Despite the Brexit vote, UK-based firms should not deviate from their plans to comply with the second Markets in Financial Instruments Directive (MiFID II), which is due to be implemented in January 2018.

There are two main reasons for adopting this approach. One is that MiFID II is based, in part, on the G20 commitments and reform agenda stemming from the financial crisis that the UK is committed to.

The other is that the EU treaties provide for a two-year period within which the UK has to renegotiate its relationship with the rest of Europe across all sections of the EU’s single market, including financial services. On the current timeline, MiFID II will have been implemented by that time.

Furthermore, Tracey McDermott, the then acting chief executive of the FCA, confirmed in a speech in February that the objectives of MiFID II were consistent with the FCA’s reform agenda and that the compliance process was too far down the road to stop.

For the UK’s financial services to continue doing business in the EU after Brexit, however, it will need what’s referred to as ‘equivalency’.

To prove equivalency, UK regulators will need to petition their EU counterparts to certify that UK legislation and enforcement mechanisms are equivalent to those EU directives that protect citizens in member countries. In the case of MiFID II, this can be achieved by implementing MiFID II-like regulation in the UK that ensures greater transparency, better management controls, safer trades, and better understanding of customers and the public.
“Equally, continuing to enjoy access to the European market is essential. That is why we have been looking at every option to ensure that in the new post-Brexit landscape we will be able to maintain our trading relationships across the continent. We look forward to the undoubted opportunities that the UK’s new relationship with the EU will provide.”

Many other leading financial institutions, such as EY and PricewaterhouseCoopers, have their European headquarters in London, but it is not just London that is important for the industry.

Financial services membership body TheCityUK released a report, UK financial and related professional services: meeting the challenges and delivering opportunities in August, which champions the UK-wide industry in the face of Brexit. It highlights that more than two-thirds of financial services jobs in the UK are outside London, and calls for a more “aggressive” approach to building regional centres for the industry. 

There is still a long way to go before Britain does in fact leave the EU. Article 50 is yet to be implemented, with few people expecting it to happen before the end of the year, and negotiations are expected to last at least two years. While this happens, the UK financial markets will still be able to operate as they have before, with the same rights, such as passporting, as before. 

Passporting is a particularly important feature of the UK’s membership of the EU, and something that many in the industry want to be retained. The ability for financial institutions to carry on their business across Europe free of local licences is a key part of their success. Rob Checkley, compliance assurance leader at Grant Thornton UK, says regulators “must ensure” UK firms can continue to passport their activities throughout Europe post-Brexit. 

According to TheCityUK report, which was produced alongside management consultancy firm Oliver Wyman, the UK needs to focus on a number of areas to ensure that the economy continues to thrive, but that it is already in a strong position to grow from. “The UK has an exceptional starting position in FRPS [financial and related professional services],” it says.
Looking ahead The report calls for the Government to refocus its attentions on key non-EU markets, including Canada, the US, Japan, and other Commonwealth countries. The UK should also “dramatically accelerate efforts to broaden the industry’s links with emerging markets”, such as China and India.

Other areas to focus on, says the report, are scaling the UK’s fintech industry, revitalising the market for infrastructure finance and advisory services, accelerating innovation in London’s insurance markets, and solidifying its place as the world’s legal capital.

The UK’s attractiveness to the world comes from its rich and varied history, and the prestige that comes from doing business here. That is something that will not change with a departure from the EU. 

However, it is clear that the coming months and years will be demanding. There must be a focus on securing the best possible terms for all our leading industries, allowing the UK economy to flourish once it leaves the EU and continue to be the global leader for financial services.

This article was originally published in the September 2016 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.