FINANCIAL SERVICES: IS BREXIT A TRIGGER FOR TRANSFORMATION?

Phil Hussey, Vice President, Industry Strategic Services, IBM UK.

London is one of the most successful financial centres in the world, and a key driver of the UK’s economic growth. However, maintaining this position will become increasingly challenging in the next couple of years as our financial services industry is also likely to be one of those most strongly affected by Brexit. Fears about banks losing access to the Single European Market, passporting rights and skilled talent are just some of the uncertainties that keep industry professionals awake at night. And while the debate about whether there will be a ‘hard Brexit’ or a ‘soft Brexit’ continues to drive speculation about the future of UK banking, financial organisations need to be able to adapt to the new market conditions regardless of what the outcome is.

Tough regulation is here to stay

There is more financial regulation at play in the financial services industry than ever, from the Payment Services Directive to the Alternative Investment Fund Managers Directive and many more. The cost of compliance with these regulations is ever increasing and Brexit will put even more pressure on banks and the government to synchronise UK and EU regulations in a way that doesn’t penalise banks.

The so-called regulatory ‘equivalence’ with the EU is often cited as the main fall-back option for the UK financial services industry following Brexit, where UK regulation is deemed equivalent to that which applies to the EU. Negotiations around this will be key for securing the future of the financial services industry and its access to European markets.

Questions remain around cross-border operations

As outlined by a recent Open Europe report, one of the key factors to consider for cross-border operations following Brexit are the ‘passporting’ regulations in place.

Currently, a UK business is able to provide a range of financial services anywhere in the EU, and in the wider European Economic Area (EEA), while being based in the UK and regulated by UK authorities. This is because businesses offering financial services have ‘passporting’ rights which allow them to offer financial services to the rest of the EEA (28 EU members plus Norway, Iceland and Lichtenstein) while only having to follow one set of regulations. Continuing access to EU markets could be a challenge following Brexit as UK banks may lose these rights and companies may move to other EU countries if these rules are not maintained.

If the UK leaves the EU without retaining EEA membership, then there are two options in terms of passporting. The UK can negotiate some level of bilateral agreements (as exists with Switzerland) or banks can lose passporting rights. Both of these options could have a negative impact on the ability of UK firms to provide services to the rest of the EEA.

Another question is whether firms will continue to host their EU headquarters in London and this will depend on the post-Brexit model that is agreed. If the passport system is not maintained,some global firms may choose to move their EU headquarters away from the UK.

Consumer banking habits are set to change
An economic downturn sparked by Brexit could impact consumer confidence and cause a minor recession, hitting banks in terms of reduced consumer borrowing. Both businesses and households may suffer from the loss of liquidity and increased cost of financial services.

Ripples could also be felt in the corporate client and financial markets sectors. A recent report published by the British Bankers’ Association suggested that the private banking sector could be particularly affected. Affluent clients that use private banking services are classed as retail customers and there is not yet a regulatory equivalence framework in place for retail customers, meaning UK private banks could be cut off from their EU clients.

Addressing these challenges will require banks to change their operating models and become more adaptive to changing customer demand. The ability to shift capital and operational expenditure quickly to where it’s needed will be key for achieving this. Moreover, banks will need to develop tailored financial services, flexible mortgage products and loyalty programmes to respond to the changing banking habits of consumer and business customers, maintaining their loyalty and trust.

Offsetting potential losses

Banks already have escalating costs, particularly in relation to regulatory compliance and many are in cost reduction mode. This conservative attitude to spending is likely to continue as we approach Brexit. It is well documented that ‘Run the Bank’(RTB) budgets are escalating and in the low interest rate environment ‘Change the Bank’ (CTB) budget is fast running out. This leaves banks in a very difficult position. They need to innovate to stay competitive and win customers, however spiralling costs are squeezing budgets for CTB projects. In this scenario, radical cost take-out programmes and offsetting of change budgets will become increasingly attractive.

Opportunities to innovate

To maintain their competitive edge, financial services firms will have to look at innovative ways to adjust their operating models,with profits squeezed in the current environment of uncertainty. This, combined with increasing operational costs, the cost of regulatory compliance and the rise of disruptive fin-tech start-ups could create a perfect storm.

While this all sounds daunting, the disruption we’re facing provides an opportunity to look at existing operations, consider what efficiencies can be made and use Brexit as the motivation to drive these forward.

Firms will need to review their infrastructure and technology landscape to ensure they are as agile as possible, allowing them to bring new products to market quickly. With regard to core technology, they should look to third parties to maintain their systems instead of owning them outright, to reduce costs and ensure operations can be easily adjusted according to market changes.

Now is the time for financial services firms to consider what Brexit will mean for them, how their operating model will need to change and how they define their brand value in this uncertain market. While many are focusing on the risks as we approach Brexit, it’s also worth considering the opportunities it presents.

Phil Hussey, Vice President, Industry Strategic Services, IBM UK.

London is one of the most successful financial centres in the world, and a key driver of the UK’s economic growth. However, maintaining this position will become increasingly challenging in the next couple of years as our financial services industry is also likely to be one of those most strongly affected by Brexit. Fears about banks losing access to the Single European Market, passporting rights and skilled talent are just some of the uncertainties that keep industry professionals awake at night. And while the debate about whether there will be a ‘hard Brexit’ or a ‘soft Brexit’ continues to drive speculation about the future of UK banking, financial organisations need to be able to adapt to the new market conditions regardless of what the outcome is.

Tough regulation is here to stay

There is more financial regulation at play in the financial services industry than ever, from the Payment Services Directive to the Alternative Investment Fund Managers Directive and many more. The cost of compliance with these regulations is ever increasing and Brexit will put even more pressure on banks and the government to synchronise UK and EU regulations in a way that doesn’t penalise banks.

The so-called regulatory ‘equivalence’ with the EU is often cited as the main fall-back option for the UK financial services industry following Brexit, where UK regulation is deemed equivalent to that which applies to the EU. Negotiations around this will be key for securing the future of the financial services industry and its access to European markets.

Questions remain around cross-border operations

As outlined by a recent Open Europe report, one of the key factors to consider for cross-border operations following Brexit are the ‘passporting’ regulations in place.

Currently, a UK business is able to provide a range of financial services anywhere in the EU, and in the wider European Economic Area (EEA), while being based in the UK and regulated by UK authorities. This is because businesses offering financial services have ‘passporting’ rights which allow them to offer financial services to the rest of the EEA (28 EU members plus Norway, Iceland and Lichtenstein) while only having to follow one set of regulations. Continuing access to EU markets could be a challenge following Brexit as UK banks may lose these rights and companies may move to other EU countries if these rules are not maintained.

If the UK leaves the EU without retaining EEA membership, then there are two options in terms of passporting. The UK can negotiate some level of bilateral agreements (as exists with Switzerland) or banks can lose passporting rights. Both of these options could have a negative impact on the ability of UK firms to provide services to the rest of the EEA.

Another question is whether firms will continue to host their EU headquarters in London and this will depend on the post-Brexit model that is agreed. If the passport system is not maintained,some global firms may choose to move their EU headquarters away from the UK.

Consumer banking habits are set to change
An economic downturn sparked by Brexit could impact consumer confidence and cause a minor recession, hitting banks in terms of reduced consumer borrowing. Both businesses and households may suffer from the loss of liquidity and increased cost of financial services.

Ripples could also be felt in the corporate client and financial markets sectors. A recent report published by the British Bankers’ Association suggested that the private banking sector could be particularly affected. Affluent clients that use private banking services are classed as retail customers and there is not yet a regulatory equivalence framework in place for retail customers, meaning UK private banks could be cut off from their EU clients.

Addressing these challenges will require banks to change their operating models and become more adaptive to changing customer demand. The ability to shift capital and operational expenditure quickly to where it’s needed will be key for achieving this. Moreover, banks will need to develop tailored financial services, flexible mortgage products and loyalty programmes to respond to the changing banking habits of consumer and business customers, maintaining their loyalty and trust.

Offsetting potential losses

Banks already have escalating costs, particularly in relation to regulatory compliance and many are in cost reduction mode. This conservative attitude to spending is likely to continue as we approach Brexit. It is well documented that ‘Run the Bank’(RTB) budgets are escalating and in the low interest rate environment ‘Change the Bank’ (CTB) budget is fast running out. This leaves banks in a very difficult position. They need to innovate to stay competitive and win customers, however spiralling costs are squeezing budgets for CTB projects. In this scenario, radical cost take-out programmes and offsetting of change budgets will become increasingly attractive.

Opportunities to innovate

To maintain their competitive edge, financial services firms will have to look at innovative ways to adjust their operating models,with profits squeezed in the current environment of uncertainty. This, combined with increasing operational costs, the cost of regulatory compliance and the rise of disruptive fin-tech start-ups could create a perfect storm.

While this all sounds daunting, the disruption we’re facing provides an opportunity to look at existing operations, consider what efficiencies can be made and use Brexit as the motivation to drive these forward.

Firms will need to review their infrastructure and technology landscape to ensure they are as agile as possible, allowing them to bring new products to market quickly. With regard to core technology, they should look to third parties to maintain their systems instead of owning them outright, to reduce costs and ensure operations can be easily adjusted according to market changes.

Now is the time for financial services firms to consider what Brexit will mean for them, how their operating model will need to change and how they define their brand value in this uncertain market. While many are focusing on the risks as we approach Brexit, it’s also worth considering the opportunities it presents.