Aite Group's First Takes in the Wake of Brexit

Brexit is no longer a question of “if” but “what now?” The implications of the U.K. vote to exit the European Union cannot be understated, and the process by which the largest financial center in the European Union will fundamentally change its role starts now. Here’s what some of Aite Group’s analysts have to say:

Javier Paz, Wealth Management:

• Foreign exchange: The U.K.’s decision to leave the EU over the medium term will have serious repercussions for London’s status as the hub for FX trading. EU and eurozone disintegration risks over the medium term are now not farfetched. Should the EU/eurozone continue their existence three years from now—which is still the likely scenario—it is hard to imagine how EU authorities would not claw FX activity for euro trading out of the U.K. and back to continental Europe.
• Retail trading: There are no early indications of brokerage firms failing, as most of these had prepared by raising client margin requirements ahead of the referendum. Retail investors, particularly those in Britain, appear to be sanguine, snapping up selectively cheap blue chip stocks while dumping smaller equities. But the hit on global equities is bound to make wealthier investors switch to risk-averse and capital-preservation modes, which ironically calls for them to tolerate negative interest rates on their investments. 

Spencer D. Mindlin and Virginie O’Shea, Institutional Securities & Investments:

• Trading: Post-Brexit, an LSE-Deutsche Boerse merger represents the best hope for continued progress toward a pan-European trading environment. With the U.K. outside, however, the practical and political issues around valuation, location, governance, and supervision just got much more complicated. Should the exchanges merge and land in the U.K., the parent entity would be outside EU jurisdiction.
• Regulation: The U.K. will not avoid the European Commission’s Markets in Financial Instruments Directive reforms, and MiFID II is likely be implemented and adopted in the U.K. well before Brexit goes into effect.
• Post-trade: The biggest impact of Brexit on the post-trade landscape is the uncertainty that surrounds the implementation of MiFIR and Central Securities Depositories Regulation, and ongoing support for European Market Infrastructure Regulation. If the U.K. opts to take a significantly different tack and does not seek equivalence under third country equivalence rules, then it will complicate compliance for all firms active in European markets. Financial penalties for settlement fails under CSDR, for example, should remain consistent between the U.K. and European CSDs, even though the U.K. is no longer technically subject to direct regulatory oversight by the EC or European Securities and Markets Authority. If it does not remain consistent, then firms in Europe or the U.K. will be disadvantaged by higher penalties.
• Derivatives: As the U.K. is the main derivatives market in Europe, it is likely that firms will begin lobbying for a reversal of some of the main provisions of EMIR. The outcome if the Financial Conduct Authority takes this tack, however, could be far from positive. Cross-border activities could become much more costly and complex. The planned introduction of interoperability across European CCPs as part of MiFIR would also be prevented if there is divergence.

Ron van Wezel, Retail Banking

• Payments harmonization: There may be an impact on regulation and payments harmonization in Europe. When the U.K. leaves the European Union, the pending EU regulation is officially no longer applicable to it, which will create uncertainty around the legal framework of payments between the U.K. and the EU. This applies to EU regulation that still has to be translated into local law, most notably the revised Payment Services Directive (PSD2). There is therefore a risk that the U.K. will in the future operate on different payments laws, making it more expensive to do business. However, countries like Norway and Switzerland are also not part of the EU but have still decided to implement most EU payments laws. The U.K. could take a similar course. And considering that the U.K. has already translated the first PSD directive and other payment legislation into national law, the country should be expected to continue following EU payments legislation.

Enrico Camerinelli, Wholesale Banking

• Supply chain finance: The SCF business may not be seriously impacted by Brexit, as it is a rather unregulated business. The U.K.’s exit will certainly (at least in the short term) hit the pound, with inevitable consequences on current SCF deals. However, the exit process will take at least two years, so the market will find its countermeasures. Biggest risk is certainly that other countries may want to leave the EU, but again this isn’t seen as a big issue. Rather, SCF will be more domestic than ever.
• Trade: Certainly trade will be affected, but it will be more on the U.K.’s shoulders. Opportunities for the rest of the EU countries will open.

Samantha Chow, Insurance

• Local carriers: Carriers in the U.K. have likely outlined some sort of backup plan in the event that the U.K. left the EU, but how extensive were those plans? The biggest threat is to local carriers as the market falls. Local carriers’ ability to manage their investments may impact their financial stability. What isn’t certain is whether this will have a long-term or short-term affect. If the market is able to stabilize and interest rates improve, then there will likely be limited impact. Conversely, there could be major long-term problems.
• Life insurance lapse rates: As the market drops and the lives of U.K. consumers are impacted, life insurance policies are likely to lapse. Consumers will be forced to evaluate what is truly important to them, and life insurance will not likely be at the top of that list. This will cause increased lapse rates and ultimately a reduction in life insurance purchases.