Well this morning we got two hefty fines handed out  $7.2 billion for Deutsche Bank and $5.28 billion for Credit Suisse, Barclays bank has decided to go to court rather than cough up in an out of court settlement. These fines relate to their selling of mortgage backed securities and collateralized debt obligations in the run up to the financial crisis in 2007. Let us be very clear these fines are not inappropriate, they are necessary to make banks understand that dodgy practices are not acceptable in the modern world of business and to encourage better future behaviour. Doctors, dentists, lawyer, accountants and other professions are expected to uphold high standards of professional practice and so should be the case in banking. The way they got involved selling dodgy securities followed by the the libor and forex rigging scandals shows that there is something very rotten going on in the world of banking.

The main problem is that the main people that suffer from such settlements are the bank shareholders who are generally innocent of wrongdoing. The real people that have suffered from the financial crisis have been ordinary citizens that have had to pay for the bailouts in the way of higher taxes, less government services and a horrendous economic crisis that resulted in a rise in unemployment particularly among the young unemployed. Pay at the top of the banking sector is still way too high, many at the top got to keep their ill-gotten bonuses and no one at the top has done some jail time. Justice has been partially but not fully served.

In my view there is a huge risk to the UK financial services sector as a result of the Brexit vote. This is particularly the case for banking, insurance and asset management. Lets be clear - this sector is particularly important to the UK economy accounting for 12% of GDP, 2.2 million jobs (7% of UK jobs), over £70 billion of net exports and £71 billion in taxes to the UK government  LINK1. In a hard Brexit scenario the UK will lose its passport rights to sell financial services thoughout the EU. Following the Single Market project of 1986-92 the concept of “mutual recognition” had come to be the basis for establishing free trade in financial services throughout the European Union.

Prior to the Single Market Project financial service firms such as banks had required a separate licence to operate in each EU member state. This meant that a UK bank required separate German, French and Italian banking licences to operate in each of these countries. This involved having to meet varying national regulations and was both a time consuming and costly process. There had been attempts by the European Commission to get a single European banking licence in place, but progress was very slow as each member state tended to argue that its banking regulation was the best to adopt at the European level and so getting agreement proved virtually impossible. The genius of the “mutual recognition” concept was that was rather than agree on all the details for say a European Banking licence, there would only be an agreement on the minimum level of standards required to obtain a banking licence applicable to all member states. Thereafter, once a bank has say a UK banking licence that has met those minimum required standards, the bank is then free to sell all its services throughout the whole EU market without the need to obtain further banking licences in each member state. A bank or insurance company with a UK licence remains regulated and supervised by the relevant UK authorities. In effect, the concept of mutual recognition gives a bank or insurance company a passport to sell all of its services throughout the whole of the EU based on its national banking or insurance licence.

The vote in favour of Brexit means that UK financial services firms such as banks and insurance companies were put at risk of losing access to the Single Market. At the time of printing negotiations were still ongoing. Even if UK financial industry retains Single Market access, it will be essential that UK legislation is fully compliant with EU regulations and laws and also complies with any changes. Norwegian firms enjoy access to the EU single market but in return have to accept all EU regulations without any say in the making of the laws and regulations, having to accept free movement of capital and labour and also with the country contributing to the EU budget. Norway also faces the continual risk of the loss of their licence to operate in the EU market, which can be withdrawn with only a month’s notice. One strategy to ensure access to the Single Market is to locate a bank’s headquarters to another European financial centre such as Dublin, Luxembourg, Paris or Franfurt which would mean expansion taking place away from London and ultimately reducing the importance of London as a financial centre.

It seems the hard Brexiteers like the clueless and delusional David Davis LINK2 are oblivious the importance of the UK maintaining its passport rights and he seems to suggest that UK financial services are more important to the EU than the EU is to UK financial services. What utter nonsense, certain financial centres in Europe such as Dublin, Paris, Luxembourg, Amsterdam and Frankfurt can't wait to get a chance to attract parts of the UK financial services sector to their cities. They want the jobs, taxes and boost to their economies.

Yes Brexit will hit the financial services sector hard as I make clear in the video below: