THE FINANCIAL SERVICES industry is diverse. But whatever it is doing, from providing car insurance to funding government debt, it intermediates between different interests. This makes it exceptionally pragmatic. Some parts of the industry make money out of instability but are small and specialised. It does not seek political controversy and it does not, as an industry, have a uniform view – it is rational, empiricist and, some might say, cold-blooded.
The industry has never been in favour of Brexit, although a relatively small number of voices have been raised in support. These have come mainly from the independent investment sector, rather than large corporations or companies with significant numbers of customers. This difference might be explained, depending on one’s point of view, by corporate pusillanimity or by the prudence that comes with responsibility for large numbers of customers and employees; by the scope for independent investors to get richer from volatility, or by their buccaneering spirit. Whatever one’s view, it is not contentious to characterise the industry as sceptical about Brexit and more inclined to see risks than opportunities.
Given this general caution, the statements of leading banks during the campaign, and since (Reuters, 2017), should receive careful attention. They are more likely to be understatements than exaggerations, and confirm that sizeable elements of international banking operations will move away from the UK.
These moves are at the hand of international banks, operating mainly out of the City of London. Financial services in Scotland are an integral part of the UK industry, complementing activities based elsewhere. Exchanges of various kinds are in London, making it one of the world’s leading centres for financial trading, and Scottish-based investors are major participants. While few financial institutions are headquartered in Scotland, many international companies operate here, principally in Edinburgh, Glasgow, Dundee and Aberdeen. Scotland’s financial services industry provides about a tenth of its total employment and about 7 per cent of Scotland’s GDP.
Most of those working in Scotland’s financial services industry are serving customers in the UK. There are successful investment managers and asset servicers (who price, administer and protect financial assets) in Scotland, with clients all around the world. But the largest employers are banks, insurance companies and pension providers, predominantly serving commercial and retail customers in the UK. That will continue after Brexit. Most customers for Scottish providers will continue to be in England, Wales and Northern Ireland. (This, incidentally, is one of the main reasons why independence for Scotland, outside the UK, is not an obviously attractive alternative to Brexit, for the industry as a whole.)
The UK will almost certainly cease to be part of the EU single market (HM Government, 2017). That market, for financial services, is not well developed. Some services, such as investment management, can be provided across borders and investment vehicles, like funds and trusts, can be sold throughout the EU. But retail services like bank accounts, insurance and pensions are provided within the regulatory and taxation jurisdiction of a member state. This means that the consequences for the UK as a whole are likely to be more significant than for Scotland, in proportionate terms, because Scotland’s main market is the rest of the UK whereas the UK industry exports more to the EU, mainly from the City of London. These City exports include ‘big ticket’ items like capital markets and currency and bond trading.
It seems unlikely that new, unexplored, overseas markets for financial services will open up, even if the UK succeeds in securing new bilateral trade agreements quickly. This is partly because trade agreements generally do not encompass services and partly because markets for financial services are largely jurisdictionally determined, as noted above. Regulation and taxation shape the demand for services and, except in some quite specialised areas, they are not provided across jurisdictional boundaries. Two Scottish strengths, asset management and asset servicing, are exceptions to this general rule, although they do not employ, compared with sectors like banking and insurance, large numbers of people. They are the most exposed to Brexit-related risks, beyond the general risk of a faltering UK economy.
The UK’s departure from the single market will add a further degree of complexity to the business of asset management and servicing but it should be manageable. It is possible to serve clients from another jurisdiction, with appropriate local regulatory compliance. The bigger risk comes from restrictions on the free movement of people, as countenanced by the UK government (HM Government, 2017).
These two sectors of the industry are the most international and the most dependent on agility in response to changing demand. The asset-servicing sector, which is predominantly operational in nature and dominated by large banks with multiple operating locations, is keenly responsive to changing client demands. Flexibility over staffing is therefore a competitive advantage and the UK is undermining its own, while adding to that of other locations that can maintain or even enhance it.
Asset management is at the cerebral end of financial services. It is dependent on attracting and sustaining concentrations of talent in places like, for example, the Edinburgh New Town. While the numbers of staff may be low in comparison with other sectors, their jobs are high-value and their decisions are influential on financial markets around the world. The reputation of Edinburgh as a financial centre rests heavily on its investors and asset managers.
Both of these cosmopolitan sectors of the investment industry are international in outlook and in operation. They are part of the very mechanism of globalisation. If, as some do, we interpret the vote for Brexit as a protest against that phenomenon, they might emerge as a part of the target that has, for better or worse, actually been hit.
Reuters (2017), ‘Morgan Stanley, Citi plan Brexit job moves: sources’.
http://www.reuters.com/article/us-britain-eu-banks-idUSKBN1542KZ [Accessed 8 February 2017]
Her Majesty’s Government (2017), The United Kingdom’s exit from and new partnership with the European Union, Cmd. 9417.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf (Accessed 7 February 2017)