Banks and financial service providers

The financial services sector is by far the greatest contributor to the gross domestic product of the UK. London is the biggest financial centre in the world, and a large number of banks, insurance companies and other financial service providers have their headquarters here. The impact of Brexit on the country’s financial services is therefore among the most frequently debated issues in the UK. One of the first reactions among major international banks on the effects of Brexit was a debate whether to relocate business activities from London to the EU. The reasons may be fiscal, regulatory or indeed strategic. Although this would not immediately lead to the demise of London as a financial centre, one major consequence of Brexit may well be the increased prominence of other financial centres.

Also, if the UK leaves the EU, British banks can be expected to experience similar consequences from the fact that European companies lose their freedom to create services and to establish branches in the UK. Many banks are currently only licensed to operate within the European Economic Area and use this licence as a basis for all their European business activities. London is undoubtedly the financial centre which has benefited most from this regulation. If London ceases to have this privilege, other financial centres are likely to gain in importance.

Alongside the possible long-term impact of Brexit on the strategic orientation of the financial services sector in the EU and the UK, there are also numerous short-term effects on those institutions. As soon as the outcome of the referendum was known, the markets became more volatile. Although most stock markets stabilised again after an initial slump, we can expect sterling to continue at a weaker level for a prolonged period of time. Many companies in the financial services sector had not anticipated those market responses. They will need to check as soon as possible whether the stress scenarios outlined by the institutions may need to be adjusted in response to actual events and what kind of assumptions the institutions will make over the forthcoming months or years in the face of uncertainty. The question that will need to be addressed by the executive boards and supervisory authorities of each institution will be the resulting impact on their risk situation and risk-bearing capacity.

Last but not least, the financial services sector will also need to keep an eye on the impact of Brexit on general economic developments. Any weakening of a national economy indirectly always affects the balance sheets of companies in that country’s financial services industry. The increasing credit risks that are associated with a weaker national economy also diminish the profitability of this industry and thus its equity capital. This also explains the initial reactions of international banks when they announced that they would be more restrained in the provision of mortgages within Greater London and that they would conduct checks on the valuation of property collateral.

BDO has pooled its experience and expertise in auditing and advising financial service companies in an Industry Expertise Centre on Banking and Financial Service Providers. Our specialists on regulatory issues, taxation and company law are constantly available to give you professional advice whenever you want to discuss recent developments and how they might affect your specific situation.