Britain crossing its fingers after voting to leave the EU

Industry legend and former head of HSBC securities services, John Gubert, highlights the after effects of Britain voting to leave the EU.
By John Gubert
The UK has voted and the electorate has instructed the government to leave the EU. London, not surprisingly, was substantially in favour of remaining. The only other regions to do so were Scotland and Northern Ireland, which may not bode well for the future integrity of the United Kingdom.

The immediate aftermath of the vote appears to be chaos in financial markets with sterling having fallen by over 10% overnight and UK based international banks having had a like performance in the Far East. The only immediate effect of the vote today will be to make collateral management quite tricky and pricing of funds difficult. In the latter case, dependent on the volatility, depositories should consider if they can price fairly.

It is the longer term that will see the biggest challenges. As a patriotic Brit, I can only hope the EU is kind to the UK as it exits. As a pragmatist, I suspect that the kindness will be easier to offer for physical trade relations, where the EU has a substantial trade surplus with the UK, rather than in the services industry.

In the immediate term, who in Europe is going to buy UK based funds when it will take a good two years or more before it is clear if they have equivalence in a post EU age? The immediate question for funds is whether they re-domicile as a precaution or launch, for those managers with an EU client base or plans to create one, EU based funds out of centres such as Dublin or Luxembourg. The short answer is that the UK based fund sector will inevitably decline as a result of the vote.

The future of clearing is also in doubt and it is inevitable that London will lose its primacy in the Euro sector. Looks like a good time to buy shares in Deutsche Boerse.

EU laws may not need unravelling if the UK simply adopts the EU financial rules as its own in its isolationist being. But the UK will most likely not come under the European Securities Markets Authority in the future and it is no given that, irrespective of action taken within the UK, the EU will grant equivalence in any form to the City
In a recent blog I commented that the City benefitted in the past as the primary conduit into Europe for the world. That role is now shattered. That diminishes the UK financial sector, as it will no doubt diminish some of its industrial companies if tariff barriers are raised between the EU and the UK. The UK will no longer be the centre of expertise in all things EU. It will no longer influence future rules as it did with the AIFMD and was doing with the CMU. For it will have no part in their formulation or their enactment which will always be in the interest of the EU’s members.

Government revenues will inevitably come under pressure and the belief that the UK will instantly formulate advantageous trade agreements with other countries, including for the all-important service sector, has always been a blatant delusion. Or perhaps the outers really believed that the mass of economists, businessmen, central bankers and civil servants were wrong, politically motivated and, in any event, that a small recession, as if one can decide its size, is of no consequence. The danger is that, if they are wrong and things go really badly, we will end up, in the UK, in political chaos with some hybrid government incorporating all that is bad in the Front National and The Five Star movement.

Welcome to little Britain. Or will it end up agreeing to be compliant with the Brussels rules, contribute to the Brussels budget without any say in its composition and accept freedom of movement of labour. For those would appear to be the minimum demands for any concessions over the coming traumatic and dangerous two years of Brexit negotiations that we face.