Brexit may bring windfall to Ireland’s financial services industry

The UK still has much to lose and the EU and Ireland much to gain

Sun, 27 Dec, 2020 - 11:13

A vast sigh of relief welcomed the last-ditch agreement between the EU and the UK. However, the deal only covers the exporting and importing of goods, services have been excluded from the get-go.

This a major concern for Ireland's financial services industry, which is a €76bn export-import business, with two-thirds of this conducted through London’s financial centre, one of the largest globally.

From January 1, UK based financial institutions lose automatic access to the EU’s single market. To serve customers in the EU next year, UK based institutions will have to be granted equivalence rights, under which the EU allows them to conduct certain financial activities. So far, the EU has granted temporary equivalence rights to British clearinghouses, as London has much of this financial plumbing, which manages trillions of dollars of derivatives contracts every day.

Over the past 50 years, London’s financial services centre has taken over much of the EU’s financial markets, managing the €90 trillion fund management industry, which allows UK managers to manage EU clients’ money out of London.

Indicating that this situation will not be allowed to continue, Mairead McGuinness, the EU’s financial services commissioner, warned earlier in December that the EU cannot permit itself to be “captured” by the City of London, saying: “Our interest is making sure that we are not captured by a system that we don’t regulate, or controlled by it.” One of the reasons we trade well with the UK is because it is the least regulated within the EU.

Member States despite the single market and services directive, have 368 regulations concerning services and thousands relating to regulated professions. Professional services are the least regulated in the United Kingdom, Ireland and Finland. The highest level of regulation is found in Italy, Luxembourg and Germany.

A major concern is the UK’s own regulations may not be accepted as adequate under EU data protection rules (GDPR) for cross-border data transfer and e-commerce, e-privacy directives which permit the free flow of data within the EU. These problems may be avoided by the use of standard contractual clauses but it is expected there will be legal challenges to the validity of these.

Whatever barriers are raised by other countries, London is likely to keep its own doors open. Rishi Sunak, the UK chancellor, has already granted the EU access to UK markets, despite a lack of reciprocation on Brussels’ part.

EU regulators want certain business currently conducted in London to take place in the EU. Banks and fund managers have relocated €1.3 trillion of assets to the EU from the UK following the 2016 Brexit vote, and more than 7,500 jobs have left the country in the same period, according to accounting firm Ernst & Young. Since the referendum, 44 firms have announced plans to make local hires in the EU for 2,850 existing or newly created roles. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets moving out of London.

The UK still has much to lose and the EU and Ireland much to gain. More than 90% of euro-denominated interest-rate derivatives and 84% of foreign-exchange trading in the EU take place in the UK.

From Ireland’s point of view there are a number of possible paths ahead: focus on new, fast-growing business lines such as foreign exchange and derivatives or establish Dublin as the EU green or sustainable finance centre. Another is that it could become an entry hub for the “fintech” digital finance companies in the US and Asia looking to enter the EU market. We have managed to dominate the global aviation leasing finance market, there is good reason to believe that Ireland can do the same in other sectors of the financial services market, now that the UK has exited one of the largest, the EU.