Five factors for a positive Brexit for Guernsey

13 September 2018

Written by Dr Andy Sloan

Dr Andy Sloan, Deputy Chief Executive Strategy, Guernsey Finance, offers five positive thoughts on ways Guernsey can benefit from Brexit.

With the UK Parliament having just returned after the summer recess and October and November, the months that expert commentators are suggesting are the deadlines for agreeing a Brexit deal, looming large, it is timely to consider what the long-term impact of Brexit may be for Guernsey’s finance sector, deal, Chequers or otherwise, or no deal.

Taking a long-term view of the impact of such a singularly significant event has little to do with traditional forecasting methods. It’s all down to judgment calls, gut instinct and selecting from competing assumptions. It’s why the economics profession can make such wildly different predictions about the same future.

For this economist, there are five factors that I believe combine to create a positive path for Guernsey’s finance sector in the post-2020 world. Despite the uncertainties, these five factors I believe are more likely probabilities than possibilities. Two are of a regulatory, market development nature. Two are more about fundamental economics, and the fifth is of a behavioural, political or commercial, call it what you will, nature.

These five ‘probable’ factors are:

  1. That the Capital Markets Union’s prescriptive regulatory approach will not ultimately create large liquid capital markets of sufficient critical mass in the EU27 capable of providing a practical alternative to London for European corporates and SMEs seeking access to financing. 

  2. That the likely development of greater supervisory roles for the European Supervisory Authorities in the goal of EU supervisory convergence, leads to another layer of supervision ‘at the European level’, harming EU regulatory competitiveness.

  3. That the Eurozone’s structural imbalances take decades to unwind, impinging on European structural growth and thus undermining new wealth and capital formation in Europe, possibly for decades. 

  4. That the UK financial services sector rediscovers its ‘global DNA’ and successfully pivots from servicing the single market, and orientates itself to servicing growing global capital pools.

  5. And that the UK recalls the importance of London’s satellite finance centres and their complementary economic role, and policy and strategy is properly set to exploit their potential benefit to UK plc after a decade of antagonism and neglect.

What is immediately obvious is the first four of these factors concern themselves directly with the impact of Brexit on the finance sectors of the UK and EU27. In short, they relate to whether or not the UK financial services industry forges a successful post-Brexit future. That really is the key determinant for whether the Channel Islands can do the same. Simple econometric analysis confirms they are symbiotic with the City.  

In the short term it is quite possible that the Channel Islands might benefit from a Brexit crisis and their economic performance diverges from that of the City. It is quite likely that in providing a safe, secure haven from the uncertainties of Brexit and beyond, to those looking for a stable, continuing platform to access the EU28 today and the UK and EU27 tomorrow, Guernsey’s finance sector experiences a boost as our third country status remains unchanged throughout the process.

What might not be immediately obvious about the five factors is they are invariant to the “type” of Brexit that occurs. This being because they are all long-term ‘structural’-type issues whose impact will dominate trend growth rates long after the immediate impact of Brexit subsides – deal, Chequers or variant, or no deal. 

The perspective that financial services are global, capital flows are global, and that growth is global, has been notably absent from the UK media narrative on Brexit and financial services. Bringing those perspectives back to the foreground of consideration should serve to broaden horizons and fields of vision, and shake off the habitual EU thinking of the single market as the singular playing field. 

It is true, the Ricardian economics of the single market are compelling. Financial services is one area where the UK has clear comparative advantage. In the EU it has continued to specialise and service the EU single market for financial services where barriers to trade are lower. Its finance sector output has grown but at a cost of a focus on a secularly slowing economy, one with massive monetary imbalances, one generally politically hostile to financial services, and one with a commensurately continually-increasing regulatory burden. Popular pressure since June 2016 to maintain UK ‘market access’ and the ‘need’ to create mutual recognition regimes or other mechanisms to achieve this ignores these characteristics of the EU single market for financial services.

The actualities of the underlying performance of UK financial services since 2008 are telling. Over that period there has been little real underlying growth in core financial services output. For sure employment across City and Canary Wharf has been impressive, but it has been driven by growth in legal, business services and regulatory compliance roles that have mushroomed as the single market rule book has been developed over the last 10 years. ONS figures illustrate that constant price output of UK financial services remains just below its pre-crisis peak and net exports of financial services have remain broadly static in constant price terms over the last 10 years. In comparison, those of legal services have grown by over 40% – growth achieved supporting the development of the single market rule book.

A positive Brexit outcome for the City depends on a continued pre-eminence in global financial services, a continued regional dominance, and a successful pivot to orientate business to growing capital pools and more rapid growth rates found in the rest of the world. In simple terms, London needs to gain more from increasing its share of rest of world activity that it loses from any Balkanisation of the European financial services market post-Brexit. 

This route is possible, no deal or no deal, but it is contingent on the UK creating a financial services regime to better and more competitively serve global financial flows and services than the regime of the single market rule book. That is why, personally, my view of the Chequers proposal is positive for financial services, in that that it provides a framework in which this can be achieved and, given its 200-year history as a global finance centre, this should not be beyond London’s ability to deliver.

All of the above is a clearly just a personal view of the realpolitik of the long-term economics for the UK’s finance sector post-Brexit. It leaves at the water’s edge my personal political views on Brexit. But for what it is worth I believed in the European Project and strongly valued the four freedoms, particularly that for people. 

But this piece is a short exposition of a view of the long-term impact on the finance sector of Guernsey, my home. That it reads as basically a brief exposition of the view that the UK finance sector should continue to flourish long-term is down to the fact that the two centres are symbiotic. That it is based on qualitative judgement, not quantitive forecast, a belief in those five factors above, is the nature of the beast. 

I have so far neglected to explain my confidence in the fifth factor. 

I have personally had the good fortune to be at, close to or had a window on many of the discussions between UK and Channel Island policymakers and opinion-formers over the course of much of the last few years and, despite continued antagonism from the expected prejudicial agendas, I have sensed a growing recognition among UK actors that London needs the continued support to its competitiveness of its financial centre satellites.

With the need for the UK to generate economic growth post-2020, I have every confidence that this process will continue.

This article was first published by Dr Andy Sloan on his LinkedIn account.

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