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Ali Shalchi

What are financial services?

When people think of financial services, they imagine banks and skyscrapers, but it’s much more than that.Most of us use financial services every day, like when using a credit card, buying car insurance, or putting money in a bank account.

Financial services make our lives easier by finding solutions to problems – like the mortgage broker who finds you a great deal. But they can be blamed when things go wrong, like the speculation which led to the 2008 financial crisis.

Why are financial services important?

The UK is a global leader in financial services. UK banks – like HSBC and Barclays – are among the biggest in the world. Lloyd’s of London is the world’s biggest marketplace for specialist insurance. And UK financial technology (fintech) firms like Monzo and Revolut are leading innovation globally.

Research by PwC estimates that about a tenth of UK Government tax revenues come directly or indirectly from the financial sector. There are over a million jobs in UK financial services – about two-thirds of which are outside London.
But the crown jewel of the sector is the City of London. According to the latest Global Financial Centre Index, which is compiled twice a year by a British and Chinese think-tank, London is the second most competitive financial centre in the world, behind New York. The highest-ranked EU city was Paris, which came tenth.

Because of this, the UK Government has historically tried to protect the financial services industry. When the EU announced a cap on bankers’ bonuses in 2013, the UK Government (led by Chancellor George Osborne) opposed the proposed law in court. The UK Government only withdrew the court case after receiving advice that it wouldn’t win.

Brexit

Over the years, the EU developed a system called “passporting” to make it easy for an EU financial services firm to work in other EU countries. So, for example, a bank based in London could open a branch in any other EU country with minimal fuss.

This led to thousands of British financial firms using passporting to do business in the EU. In 2019, 40 per cent of all UK financial services exports went to other EU countries.

So the result of the 2016 Brexit referendum shocked the financial services sector. Firms were worried that they might lose “passporting” rights and be forced to stop some or all of their operations in the EU.

Initially, many firms hoped that if Brexit went ahead, a deal would be struck between the UK Government and the EU to keep “passporting”. But in her Mansion House speech in March 2018, Prime Minister Theresa May said that keeping passporting rights was not an option because it would require the UK to sign up to EU rules.

The deal

While maintaining “passporting” seemed unlikely, many firms hoped a deal could be agreed to enable easy access to the EU. But it became clear that this wasn’t on offer.

The trade deal between the UK and the EU was announced on Christmas Eve 2020. It had some general protections for financial services firms but offered no special access for UK firms to the EU market. The Mayor of London, Sadiq Khan, described the deal as “effectively a no-deal Brexit for finance”.

Prime Minister Boris Johnson said that the deal did “not go as far as we would like” on financial services. Overall, while the deal is better for the financial services industry than a no-deal would have been, it is far short of what the financial services industry wanted.

The future

It will take time before we know the full impact of Brexit on UK financial services. Early indications suggest that some business has been lost, but it hasn’t been as bad as expected by some in the industry.

Think-tank New Financial reported in June this year that about 7,500 financial services jobs, and about $1 trillion of assets, had moved from the UK to the EU since the 2016 referendum.

But the UK – and London in particular – is likely to retain its status as a global financial centre. For now, banks and investment firms have largely remained in the UK, and no city in the EU has launched a serious challenge. The bigger competitive threat seems to come from other global centres like New York and Hong Kong.

Some leading figures across the industry actually think that Britain’s new ability to shape its own regulations outside of the EU single market could be a big asset. The Government thinks so, and has been consulting on how best to use the extra powers gained from Brexit to “cut red tape” and make the UK more competitive.

Islamic finance

One area of financial services the UK Government has been keen to develop is the Islamic finance industry. Earlier this year, the Government borrowed £500 million by issuing Islamic bonds (sukuks) to investors in the Middle East, Asia and the UK.

One issue of particular significance to British Muslims has been the campaign for the Government to provide Islamic finance for students. In 2013, Prime Minister David Cameron promised no Muslim would feel they can’t go to university because they can’t obtain a sharia-compliant loan. But the Government hasn’t yet committed to providing this by a specific date.

Ali Shalchi,
banking lawyer, House of Commons Library’s specialist on financial services, advising MPs impartially on bills and policy.

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