The world’s markets were thrown in to turmoil as a result of the UK’s decision to leave the European Union after its referendum on 23 June 2016. Trading since the vote has been frantic.
Most major UK indices have been hit, with billions wiped off the FTSE 350 while banks, house builders and travel stocks have been particularly hard hit. Currency traders have seen wild movements in cable with Sterling falling to its lowest level in 31 years against the US dollar.
Some of the world’s leading economists and analysts have since warned that the UK must now brace itself for sustained pain as a result of the decision.
What is also clear is that, longer term, there will be deeper waves throughout financial services as banks, asset managers, exchanges and vendors decide where best to establish a European base of operation.
Prior to the vote, senior figures at HSBC and Goldman Sachs had both threatened to move some jobs out of the UK if the EU Referendum resulted in a Brexit vote. Both organisations have, at the time of writing, not issued any further announcements about following through on these plans.
In February, HSBC chief executive Stuart Gulliver warned that up to 20% of its London based investment banking team could be moved from London to Paris if the vote was to leave.
In the immediate aftermath of the vote, stories had also circulated on social media that Morgan Stanley was looking to move jobs. The bank’s press office told The Trade that these stories were “entirely false”, although many broadcast outlets have persisted in running stories suggesting otherwise.
The picture is slightly different at JP Morgan. Within hours of the vote to leave, the bank, which has some 16,000 employees in the UK said that while it will continue to maintain a large presence in the UK, it would be looking at “the location of some roles.”
Initially suggestions reported by the BBC, The Guardian and The Times were that JP Morgan could seek to relocate as many as 4,000 of these roles, but the bank said that it was too early to say.
A statement emailed to its staff – and later forwarded to members of the media – said: “In the months ahead, we may need to make changes to our European legal entity structure and the location of some roles.
“While these changes are not certain, we have to be prepared to comply with new laws as we serve our clients around the world. We will always do our best to take care of our people and do the right thing during times of change.
“We recognise the potential for market volatility over the next few weeks and we are ready to help our clients work through it.”
Elsewhere, there were concerns for the future of London’s clearing community too. In 2014, London successfully defended a challenge to force all euro-denominated clearing into the Eurozone.
The Brexit vote may now find its status will be challenged once more, according to former MEP Sharon Bowles. Staff working at LCH.Clearnet and Intercontinental Exchange’s ICE Clear Europe could yet be impacted. While the European Bank voted in favour of UK-based CCPs last time, the implications of the Brexit vote may be stark.
More broadly, consultancy group Deloitte released a guidance note to financial services firms in which it stated that companies should “begin to work through detailed plans for any relocation strategies that may need to be invoked.”
The regulatory story is also a complex one with most expecting significant change.
Jonathan Hill is the UK’s representative in Brussels. He resigned on Saturday 25 June 2016 – one day after the vote was announced and will hand over all responsibilities on 15 July 2015. Hill was an important figure for the UK in Brussels as he was handed the mandate by EU president Jean Claude Juncker to look after Financial Stability, Financial Services and Capital Markets Union when he took office in November 2014.
Hill’s departure is one of the first signs that the warning from the Remain camp may have been true. Specifically, that the UK financial services industry (which will have to maintain the same regulatory standards as its European rivals in order to remain competitive) may lose its influence on shaping regulation in Europe. This, of course, will have to be judged over a much longer period.
Financial trade groups such as the Investment Association and the Alternative Investment Management Association (AIMA) have released statements calling for members to retain a ‘long term focus’.
A spokesman for the Investment Association, said: “[As it stands] the UK remains a member of the EU and the rules and regulations governing asset management remain unchanged, and the protections that were in place for clients yesterday remain in place today.
“The focus in the short-term will be on how markets respond, but it is important that we adopt a collective long-term focus on how the UK can preserve the pre-eminence of its financial services sector including our highly successful £5.5trn asset management industry - the second largest industry of its kind in the world.”
AIMA went much further though, noting the investment and time that its members have invested in becoming compliant with Europe-wide regulations and how it would move to protect this.
The trade group said it would be looking for clarity on the impact of Brexit on the Alternative Investment Fund Managers Directive (AIFMD), European Market Infrastructure Regulations (EMIR) and the Markets in Financial Instruments Directive II (MiFID II).
In a statement, chief executive Jack Inglis, said: “We recognise that members have made large investments in getting compliant with these rules and will be looking for clarity as to what to do about future expenditure plans.
“It is extremely important for members from outside the EU that they continue to have access to EU markets and EU investors. Those inside the EU should continue to have access to the UK market. This position will drive our advocacy work in the period ahead.”
As a result, the AIMA Government Affairs Committee said it would now be specifically focussing on five key areas. The first would be the AIFMD Passport and whether the UK will be granted this or not. Second on the agenda is MiFID II and the implications of Brexit on preparations.
The third concern was in relation to EMIR and where is the best clearing centre. Then there are other priorities such as how to sett up an EU management company to meet UCITS requirements and the need to consider whether the Financial Transaction Tax (FTT) risk has gone.
With the UK prime minister David Cameron resigning in the wake of the Brexit vote, the gun has fired on a the race to find a new leader for the UK’s right-leaning Conservative party.
Former London Mayor Boris Johnson remains the favourite to become the next leader and was ‘evens’ with some bookmakers to get the top job, ahead of home secretary Theresa May who was 2-1. Other potentials include energy minister Andrea Leadsom (9-1) and former defence secretary Liam Fox (12-1).
The Brexit vote opened up major divides within both main parties in Westminster and things are not much better on the other side of the Commons.
The UK Labour party’s hard-left leader Jeremy Corbyn – who became leader in September 2015 – has been attacked for not campaigning hard enough during the build up to referendum vote.
At the time of writing, 18 members of the Shadow Cabinet have resigned including shadow foreign secretary Hilary Benn, shadow justice secretary Lord Falconer, shadow Northern Ireland secretary Vernon Coaker and shadow Scotland secretary Ian Murray.
Then there is the issue of the future of the United Kingdom of Great Britain and Northern Ireland. Scotland voted 62% to remain in the EU, unlike England which voted 53.2% in favour of leaving.
Nicola Sturgeon – the first minister of Scotland and leader of the Scottish National Party – has said she will do everything in her power to protect the interests of Scotland.
In several televised interviews since the Brexit vote, she has said that a second Scottish independence vote was ‘on the table’ and she has said that she would considered methods to veto the UK’s exit from the EU if Scotland would be impacted.
A poll for the Scottish Sunday Post on Sunday 26 June found that 59% of Scots would now back an independent Scotland.
Initially, the Bank of England attempted to reassure market participants, with a statement saying that it has “undertaken extensive contingency planning” and that it is “working closely with HM Treasury, other domestic authorities and overseas central banks.”
It added that it will “take all necessary steps to meet its responsibilities for monetary and financial stability.”
Since the BoE statement, chancellor George Osborne attempted to strengthen markets by adding that the UK was in a “position of strength” but said that no further economic adjustments would be made until a new prime minister was announced.
He said that only the UK could begin the process of leaving the EU because the rules state that only the UK premier can trigger Article 50 of the Lisbon Treaty.
Ratings agencies have done little to reaffirm this “position of strength”, however. UK ratings agency Standard & Poor's issued a statement warning that the UK is likely to lose its AAA credit rating as a result of the vote. Rival Moody’s also downgraded the outlook from “stable” to “negative”.
Saker Nusseibeh, chief executive of Hermes Investment Management, said the UK now faces the prospect of a recession, although, admittedly not all economists agreed.
He said: “Besides a sharp sell-off in risk and in sterling, as well as a recession in the UK (which is expected) our fear is that this may trigger political uncertainty within Europe which in turn may lead to a severe global market correction.”
Piers Hillier, chief investment officer at Royal London Asset Management, added: “We expect the UK will fall into a recession. Unfortunately I see unstable market conditions lasting for between three and five years whilst new trade agreements are drawn up.”
The doom and gloom predictions were plentiful and even those who were more upbeat, said that the uncertainty alone was likely to hit global markets hard for some time.
The world’s largest fund management group warned that it expects the UK’s “divorce” from the European Union to be “messy, drawn out and costly”.
BlackRock said the result meant that the UK would now have to “unpack UK and EU laws” and strike trade deals with “a spurned EU”
It continued: “We expect potential losses in services exports and investment flows to overwhelm any benefits of lower payments to the EU.
“We see a weaker euro over time and pressure on European shares, credit and peripheral bonds such as Italian government debt due to likely European job losses and lower growth.”
Economists at different buy-side groups disagreed over the extent of the economic fallout for the UK economy, however.
Royal London Asset Management predicted the UK would head towards recession in the second half of the year while Schroders said it did not believe that would be the case.
Ian Kernohan, economist at Royal London Asset Management, said: “Given the sharp rise in uncertainty for households and firms, it now seems sensible to assume a UK recession in the second half of this year, with spending decisions postponed until the situation becomes clearer.
“The longer-term impact on economic activity depends on the new trading arrangements which the UK must now negotiate with the EU and the rest of the world.”
Azad Zangana, senior European economist and strategist at Schroders said he thought the UK could expect a slow down in employment and possibly a fall.
He said: “The fall in investment and hiring is likely to be felt by households as employment growth slows and possibly falls. Overall, we expect GDP growth to be considerably lower in the near-term, and inflation to rise sharply.
“Our Brexit scenario estimated a fall of 0.9% in GDP by the end of 2017 compared to our baseline forecast, and a rise in the level of CPI (consumer price index) inflation by 0.6%.”