Britain's exit from the European Union will dislodge Switzerland as the top European financial player outside of the bloc. Ingo Rauser details what this means for the race among financial centers, in an essay for finews.first.
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Brexit will bring challenges to issues ranging from client relationships, to booking models, location selection, market access and regulation. There is also concern about data protection as data is stored in single locations and needs to be processed cross-border. I don’t know how markets will change post-Brexit.
Transformation and implementation are time-consuming and expensive. During the last couple of years, companies have spent millions on regulation considering the U.K. as a location within the European Economic Area, or EEA. This will have to be reviewed as the status of the U.K. is yet unclear. There are several key considerations for Swiss business:
Large Swiss firms with a presence in the U.K. have opted to move offices to Frankfurt, Paris, Madrid and Dublin. At the same time, a number of wealth managers have increased their presence in the U.K. Swiss firms should ensure to defend market access against the big players. With strong competition from rivals in the EU and the U.K., Swiss companies need to foster new hubs and booking models to best serve their clients.
«Switzerland will remain more constrained than the U.K.»
How strongly liquidity in the markets will be affected post-Brexit is unknown. Many European execution venues are moving away from the U.K. to the EU to serve their EEA counterparties. Firms have started creating additional booking models to manage their trading and risk. MiFID’s trading obligations remain a key topic for various Swiss venues – currently, Switzerland is negotiating their market equivalence with the EU. With Brexit, both the U.K. and Switzerland will resolve equivalence issues to provide market access of their financial products.
Switzerland will no longer be the top non-EU financial player in Europe. Political focus will remain on the U.K. with a market of 60 million people as opposed to Switzerland’s 8 million. Switzerland will have to wait for the U.K. and decisions on equivalence for market-access in order to avoid setting a Swiss precedent before the conditions are settled. Switzerland will remain more constrained than the U.K. as it needs to adhere to the existing bilateral European agreements to access the EEA market. The U.K. gets the opportunity to agree its new agreement post-2020.
«The cost advantages of the U.K. will provide a competitive disadvantage for Switzerland»
The U.K. will emerge as a strong non-EU, low-regulation wealth management competitor: U.K. wealth and asset managers are well established. A light regulatory regime in the U.K. could give those firms a significant competitive advantage. Not to mention the cost advantages of the U.K., especially if the pound drops further, which will provide a boost to the export market – and a competitive disadvantage for Switzerland.
Companies are currently preparing for and evaluating all options for both a hard and a soft Brexit. The primary focus should be on:
- Minimizing cross-border, operational and implementation risks from large banking service networks across the U.K., the EU and Switzerland
- Reducing client impact in terms of product offering, outreach, etc.
- Ensuring EU and U.K. financial service market access
- Ensuring that service offerings from U.K.-based firms are not disrupted in near short term
- Minimizing impact on staff
Considering volatility, risks of uncertainty and a hard timeline, financial institutions will require advice on how to manage their business. In the long term, with more clarity available, companies will be better prepared to deal with the new reality. It is time to act.
Ingo Rauser is a senior partner at Capco, a global banking consultancy. The economist has 20 years of experience in financial services advisory. At Capco, Rauser specializes in regulatory transformation issues in the Swiss and international business.
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