Delegates at the annual Inrev conference in Berlin this week heard two diametrically opposed views regarding the likely path to Brexit that the UK and the European Union have now embarked on, and which of the two will be hurt most by the divorce.
'We're not leaving the European continent but the European Union,' Matthew Elliot, senior fellow at the Legatum Institute and former CEO of Vote Leave, told the conference. 'We hope that there will still be mutual benefits through bilateral treaties.'
Elliot conceded that discussions on financial services were potentially the toughest part of the deal. Brexit will mark the end of free EU passporting rights for banks and fund managers located in the UK and this is widely expected to have repercussions on specialists in corporate finance, derivatives, brokerage and asset management in particular. Real estate fund managers will also be affected.
However, Elliot said he was confident that the UK and the EU would continue to have a successful relationship. ‘The Brexit vote was not about pulling up the drawbridge... There’s no reason to think we can’t have a free trade agreement with the EU. I’m optimistic that a trading deal will be done.’
He added that he was also optimistic that the terms of the divorce would be thrashed out in the next 18 months, leaving the remaining six months of the two-year period to negotiate a new deal. But that scenario was squashed by Karel Lennoo, CEO of Centre for European Policy Studies in Brussels. A more likely date for a new deal between the EU and the UK was 2021 at the earliest, Lennoo said.
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From left to right: Karel Lennoo, Greg Clark and Matthew Elliot. Photo credit: Inrev)
Unhappy outsider
The UK first has to finalise its complete withdrawal before any new deal can be negotiated, Lennoo warned. 'There are so many parties, so many individual nation states…It will be extremely difficult to negotiate. Until March 2019, the UK will be a reluctant insider. And from March 2019 it will be an unhappy outsider.'
On a positive note, Lennoo conceded that the tone of UK prime minister Theresa May in her formal letter to the EU announcing the pending split, was constructive. But, he added, political risk has not decreased as a result, in fact it has increased. Moreover, the UK faces a high cost for leaving the EU, with estimates of €60 bn recently being mooted. Lennoo: 'Who will suffer the most from Brexit? Obviously that is the UK.'
Revanchist attitudes dominate in the rest of the EU, he added. 'Other EU cities are looking at how they can grab business from the City. London has more to lose than the rest stands to gain.'
While Eliot stressed that no deal would be better than a bad deal, Lennoo disagreed, saying that a bad deal would be better than no deal, especially for the financial services sector. 'An uncertain transition period will be very damaging for the finance industry,' he argued.
Barriers to a free market
By leaving the EU, the UK will create more barriers to trade, services and goods, Lennoo noted. 'That will increase costs, also for financial services. All in all this will create a lose-lose situation. It will make our single market less efficient and means businesses will become more fragmented.'
The diversity of EU rules will affect the entire asset management value chain and negotiations will be complex, he added. In that sense there will be one clear beneficiary: ‘This all means big business for law firms.'
