Brexit has been on the minds of financial services executives for just over six months now. After an initial bout of uncertainty that has been worrying for the industry, expectations are starting to stabilize. Currently banks are laying out their contingency plans for exit from the European Union and are hoping to appease the UK government into negotiating a good deal for financial services.
Caught in between the arms-twisting race between the UK government and big banks, the UK brokerage industry is one that is fearing the worst for its operations. The firms targeting EU clients will have to seek separate EU regulation, since May said that a Switzerland or Norway option is out of the question.
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The UK Financial Conduct Authority has recently outlined its tough plans for the retail Forex and CFDs industry with the introduction of a leverage cap of 1:50. The message is clear - the UK government is aiming to diversify its economy away from financial services. Talks of re-industrialization of the country are met with applause at home by the very same people that voted for Brexit.
Negotiations - London is Leverage
Brexit is obviously going to happen, there should be little doubt about it at this point, however London can get some special treatment. Theresa May’s speech on Tuesday outlined that the government is aiming to protect the interests of London’s financial sector, but at this point all this largely hinges on the position of the European Union on the matter, or so people say.
In actuality the UK is in a pretty good position from a negotiating standpoint when it comes to a free trade agreement. Here is why - while the UK has a net £20 billion surplus when it comes to services, the goods net trade deficit with the EU is of nearly £100 billion with the European Union in 2015.
The difference is clearly a worry for German manufacturers more than it is for the UK financial sector in nominal terms. This is the position of the UK government that is committed to following the result of the Brexit referendum. The alternative scenario of not adhering to the vote would greatly undermine the UK’s democratic process.
Looking at the UK's balance with the rest of the world, its service sector exports a net of £67 billion in services, and imports a net of £30 billion in goods.
The Broker’s Perspective - Refocus Globally
This is the time to focus on the brokers’ perspective in case of a clear EU break with no passporting rights into the EU. Financial services clients from China, India, the Middle East and North Africa have much more confidence in doing business with London than with any other European city.
Granted, some business in the European Union will become tougher and not all brokers will have the ability to obtain a license on the continent, or at least not very quickly. What the brokers should do is not focus on ‘Brexit means Brexit’, but on the new hype that Theresa May is pushing - 'Global Britain'.
Time to Expand Outside of the EU
Brokers should be urgently moving towards a global focus and using the leverage that they have with FCA regulation. Targeting EU clients has been relatively easy when compared to the rest of the world, so additional financial commitments will be needed, but as the European Commission ironically points out, “over the next 10 to 15 years, 90% of world demand will be generated outside Europe”.
The trust in FCA regulation around the globe is substantial. Brokers have all the opportunities in the world they can hope for. While the European Union becomes more difficult to operate in, the rest of the world is starting to open up to the world of financial markets and the need for brokerage services will only increase if a Donald Trump presidency delivers on the big hopes that are associated with it.
Transitioning Great Britain into ‘Global Britain’ is not an easy thing and the UK government knows this. That said, it has already started building bridges with the Trump administration and is steering the UK once again into closer ties with the US. This only makes sense since the likelihood of Democrats and Labor winning any election in the coming several years is quite slim.
