SCOTLAND’S crucial financial services sector has been thrown into fresh uncertainty following the UK’s departure from the European Union (EU), as sector observers declared the end of “passporting” effectively amounts to a no-deal Brexit for the industry.
The early ramifications for Scottish exports from the long-awaited trade deal agreed by the UK and EU on Christmas Eve is continuing to dominate headlines, as new customs agreements and bureaucracy block the transportation of millions of pounds of seafood to the continent.
But while exporters are getting to grips with new rules on trade, there is no agreement in place between London and Brussels on the way forward for services – by far the biggest sector of the UK economy.
This is causing fresh uncertainty for firms in financial services, which are now in the dark over how they do business with EU countries following Brexit.
The biggest change relates to the end of passporting, which allows firms in EU countries to sell their services in fellow member states.
In its absence, it is expected that a system of equivalence, in effect where the UK and EU recognise each other’s rules and regulations, will be pursued, under which UK firms could continue to operate within the bloc.
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However, an equivalence agreement has yet to be finalised.
Equivalence does not cover the same range of activities as passporting and, moreover, the EU can withdraw equivalence at just 30 days’ notice.
It is currently unclear whether the UK and EU will work towards agreeing a formal deal on equivalence for financial services, or whether firms in the UK that wish to trade within the bloc will have to do so on a country by country basis.
Industry figures are now eagerly waiting for a Memorandum of Understanding (MoU), which London and Brussels have agreed to publish on March 31. It is hoped the MoU will set out how UK firms can operate in the EU in future.
Betsy Williamson, managing director of Edinburgh-based Core-Asset Consulting (pictured) a specialist recruiter for the financial services sector, said all eyes are fixed on March 31.
Ms Williamson said: “If the detail of this MoU isn’t there, and doesn’t go into the level of depth that would be required, then it absolutely would prohibit the revenue-earning potential [of firms].
“When you look at the detail of the trade agreement that you have for goods, it would appear that the details have not been ironed out. If that is mirrored in financial services, we are definitely going to be in challenging waters.”
Asked if a disadvantageous agreement could deter financial services firms from setting up in cities such as Edinburgh and Glasgow, Ms Williamson said it could affect the start-up rate “if we didn’t have a framework in place which was clear, and allowed us to understand how we could compete equally for business in Europe, with European businesses of the same size.”
Ms Williamson downplayed the risk of major global players turning their backs on Scotland, but added: “The ability to compete for business regionally is much more important, and if we don’t get that detail ironed out it could prohibit organisations from starting up here. And that’s what we want to avoid, because new starts are the green shoots of the industry.”
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Colin McLean, director of Edinburgh-based SVM Asset Management, said: “It is too soon to tell what the impact might be on financial services. [It is] much different for banks and insurers than investment managers and other advisers.
“Most financial services firms have already made some contingency plans but the picture is uncertain and equivalence has still to be discussed – so it is harder to see what to plan for.”
Laith Khalaf, financial analyst at AJ Bell, said that, while firms could sell into EU markets “carte blanche” before Brexit, with equivalence it was “not guaranteed”.
He said: “If they think the UK is diverging in certain areas, [access]could be withdrawn.”
Tej Patel, regulatory practice lead at analyst Capco said: “Given that financial services were not within the scope of the new UK-EU trade and cooperation agreement UK-based financial services firms lost their passporting rights as of January 1… they consequently face significant uncertainty as we move forward into 2021.
“While the TCA does provide a way forward for UK-based firms to continue to provide services into the EU, this is currently entirely at the discretion and requirements of each member state. As a result, UK-based firms are effectively now operating under their no deal/hard Brexit scenarios.”
Meanwhile, Scots law firm Burness Paull says corporate deal-making activity has so far shown no signs of being slowed by Brexit.
Corporate finance partner Mark Ellis said: “We have not seen any indication of that being impacted by Brexit.
“We have got deals on the go that are pan-European deals [and]have got European counter-parties on transactions. The market is pretty hot at the moment, I have to say.”
Chris Horne, regional chief executive of accountancy firm Azets, said Brexit was not causing any “dramatic pain”, but noted:“We are having to jump through extra hoops when we want to transmit client information from the UK to Europe.”