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91% of firms say Brexit is most serious challenge to the UK financial services

Two reports – one from leaked from the government and another published by the Confederation of British Industry (CBI) and PwC – say Brexit will have a negative impact on British business and financial services. A leaked UK government report giving economic analysis of three possible Brexit scenarios shows that Britain will be economically worse off after it leaves the EU, with financial services one of the worst-hit sectors. The document – EU Exit Analysis—Cross Whitehall Briefing – was leaked to BuzzFeed and looks at three Brexit scenarios:

  1. no deal on WTO rules;
  2. a comprehensive free trade agreement with the EU; and
  3. Norway-style continued single market access through membership of the European Economic Area.

Each of these possibilities would reduce the UK's economic growth over the next 15 years – by 1) 8 per cent, 2) 5 per cent and 3) 2 per cent, respectively. The report's forecasts are less negative than some previous economic forecasts on the impact of Brexit and it's also worth noting that predicting economies 15 years in advance is an imprecise art at best. Conservative MP Iain Duncan Smith also told the BBC the report is incomplete and should be taken “with a pinch of salt”.

CBI/PwC backs up leaked Whitehall document

However, the leaked Whitehall analysis isn't the only report to say that British financial services will face difficulties following Brexit. The CBI/PwC Financial Services Survey of 92 companies found that, in Q4 2017, optimism in the financial services sector fell for the third consecutive quarter. The report said that this “rounds off two years of continuous flat or worsening sentiment, but business conditions saw moderate improvement”. The survey gathered opinions from a range of financial organisations, including banks, building societies, insurers and investment managers. It found that virtually all firms view the impact of Brexit uncertainty as the most serious threat to the UK’s position as a leading global financial centre. Perhaps the key word in that analysis is uncertainty, implying that the most damaging aspect of Brexit for businesses currently is the uncertainty of what future trade relations will look like.

Certainty needed

The CBI's chief economist, Rain Newton-Smith, said: “To restore some confidence, financial services firms absolutely must – no ifs, no buts – get as much certainty as possible on what the UK is aiming for in the Brexit negotiations, the opportunities of success and the consequences of failure.”

Other issues that threaten the UK’s global competitiveness include the quality of the UK’s physical and digital infrastructure and an increasingly complex tax and regulatory regime. As well as needing a clear picture on how Brexit will play out, companies need to review their investment in technology and review their compliance with regulatory demands such as Open Banking and PSD2, Mifid II and GDPR.

The CBI/PwC survey findings include:

  • Concerns about the impact of Brexit uncertainty on the financial services sector shows no sign of abating. Nine out of ten firms (91%) cited it as the most serious challenge to the UK’s position as a leading global financial centre
  • Optimism in the financial services sector dropped noticeably, the seventh quarter of declining sentiment in the last eight quarters (the exception was the first quarter of 2017, when sentiment was flat). This marks the longest period of falling sentiment since the global financial crisis of 2008
  • 13% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 35% were less optimistic, giving a balance of -22% (compared with -6% in the quarter to September)
  • Looking ahead to the quarter to March, growth in business volumes is expected to pick up somewhat: 17% of firms expect volumes to rise next quarter, and 3% expect them to fall, giving a balance of +14%.

This item appears in the following sections:
Bank Relationship Management & KYC
Evaluating Banks' Overall Performance
Cash & Liquidity Management
Cash & Liquidity Management in Europe
Risk Management
Financial Risk Management

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