EU Referendum


Brexit: money walks


28/09/2016




The Times is suggesting that a "hard" Brexit could cost the Treasury £10 billion in lost tax revenue from the City.

This supposedly comes from Treasury officials. Were they the same, one wonders, who came up with those pessimistic pre-referendum forecasts that only just stopped short of predicting that we were all going to die? 

Undoubtedly, this is also a pessimistic line, based as it is on the City losing its entire earnings from its EU business, which contributes about £10 billion in tax each year – about a third of the total £31 billion a year the City hands over in various forms of taxation.

Even the worst of the worst-case scenarios, however, can hardly be predicting that the City would lose all its EU business, even if some it at risk through the loss of passporting rights – which allow financial service businesses to set up in London and run branches the EU under the single "home regulator" approval.

Not least, there is the likelihood of some operations qualifying for "third country passports" – also known as equivalence – which would permit post-Brexit operations in London to trade in the EU – albeit restricted to wholesale business.

Nevertheless, there is a considerable amount of business at risk. About 15 percent of all branches and subsidiaries of non-euro area banks in the banking union are branches or subsidiaries of UK banks. Based on data at the end of 2014, these operations accounted for at least €750 billion of total assets.

And this is not the full extent of the risk. The City also stands to lose if some of the foreign banks walk. Those that have set up headquarters operations in London because of EU access might think twice about keeping their main offices in the UK capital.

The foreign presence in London is not insubstantial, as foreign banks (via branches or subsidiaries) represent 37 percent of total bank assets in the UK. The UK is also a major host for EU bank sub-entities – carrying approximately €1 trillion of assets.

On top of that, there is also the possibility of the loss of retail business. According to a confidential report produced for the British Banking Association (BBA), the UK credit-card industry - dominated by Barclaycard – is particularly at risk. It issues 73 percent of all cards across the EU and could see its market share eroded.

The UK would no longer be part of the bloc's Interchange Fees Regulation (IFR), which limits the charges for merchants accepting credit or debit cards and prevents retailers from discriminating against regulated cards. Customers could thus face stiff fees from retailers or cash machines across the bloc.

In truth, though, no one knows the precise effect of Brexit, hard or soft, on the financial services industry, although Brexit department officials have commissioned a detailed technical analysis to fill the knowledge gap.

The one thing for sure, though, is that a "soft" Brexit, keeping us in the EEA and in the Single Market would avoid most of the grief. UK firms would keep their passporting rights, and the overall impact on the business would be slight.

However, what The Times story does is remind us that the different Brexit strategies come with different price tags. And there can be no dispute that the "hard" Brexit will have a very substantial cost – possibly more even than we are currently paying in contributions to the EU.

Should the true cost of a "hard" Brexit be calculated (as best it can), and widely promulgated, one might see this having a strong effect on public sentiment. People will begin to realise that, while politicians talk, money walks – and, most likely, we will end up paying the price.