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The Actuary The magazine of the Institute & Faculty of Actuaries

Brexit could ‘significantly dent’ UK’s financial sector 

A UK referendum vote in favour of leaving the EU could pose a risk to growth prospects for the UK economy and its financial services sector, according to a report by Standard & Poor's (S&P).


Canary Wharf, London © Shutterstock
London would remain as a global financial centre even in the event of a Brexit, said S&P. © Shutterstock

The credit rating agency said financial services attracted 30% of the inward foreign direct investment (FDI) into the UK – equivalent to 17% of the country’s GDP. It said nearly half (46%) of the FDI into the UK financial services sector came from EU investors. 

However, while Brexit would be costly for the insurance sector, S&P did not expect firms’ operations to be “significantly curtailed” as their trade was more reliant on non-EU countries such as the US.

The firm said although London would maintain its status as a global financial centre even in the event of a Brexit, global banks would be likely to consider other locations as bases for their European operations. 

“UK-domiciled banks make active use of their UK authorisation to provide banking and trading services across the EU and European Economic Area (EEA), known as passporting rights,” said the report.

“Without these rights, we see a risk that enough major global banks could choose to route their business through other financial centers in the EEA that retain those rights.”

Frank Gill, credit analyst at S&P, said: "We believe it could significantly dent the UK's current net trade surplus in insurance and financial services of more than 3% of GDP."

The agency said the effect of a Brexit would depend on what arrangements the UK could negotiate to replace EU membership. These arrangements could include rejoining the European Free Trade Association, of which the UK used to be a member, or negotiating a series of bilateral agreements with the EU.

"However, the extent of this impact will crucially depend on what alternative free trade arrangements the UK government could agree with its European partners in the event of an exit," said Gill.

"Given that the UK operates the second-largest current account deficit in the world, to put at risk one of the few net exporting sectors via a highly politically charged referendum would in our view pose substantial risks to the balance of payments, the currency, and the economy”.

The UK government has said it will hold a referendum on whether to leave the EU by the end of 2017.