After 1645 days of turmoil and entanglement, the Brexit separation farce finally ushered in the final chapter on Christmas Eve of 2020. The UK and EU reached consensus on a provisional trade agreement. Political leaders on both sides couldn’t help but be overjoyed. British Prime Minister Boris Johnson even cheered on Twitter with arms raised. But in all fairness, if it were not for the sudden outbreak of Wuhan pneumonia which fully exposed the tragic consequences of hard Brexit ahead of time, the UK and EU negotiations might still be deadlocked over fishing rights.

The UK-EU Trade Agreement was claimed to be the largest in scale in history, spanning more than 660 billion pounds of trade volume. Boris Johnson has also achieved the much sought-after “Canada Style”. That is to say, while the UK’s trade policy remains independent and free from EU regulations, UK exports to EU markets can maintain zero tariffs. Beneath the seemingly perfect trade deal lies a fact. Under the CETA free trade deal with the EU, if a Canadian financial firm wants to do business in any single European market, it must apply for permission from the EU financial authorities. The UK financial industry will also face the same situation in the future.

Leaving aside the fact that the deal still needs to be agreed by the Parliament and Congress of the UK and EU respectively, the UK-EU trade agreement without any provisions for the trade in financial services is, frankly speaking, only half completed for the UK. As we all know, financial industry is the lifeblood of the UK economy and is regarded as the most brilliant gem in the Queen’s crown. The annual output value of the financial services industry accounts for about 8% to 10% of GDP, creating more than 2.3 million jobs; trade in financial services to the EU is valued over 26 billion pounds, which is 21.7% of the total volume and contributes significant trade surpluses. London is the hub for global financial institutions as well as customers seeking financial services, and is listed as the world’s two largest financial centers alongside New York.

In the past, because the UK and EU were under the same roof, foreign financial institutions could enjoy free access to the financial markets of all EU countries as long as they are licensed in London. Now that free access to all countries with one license is gone, new licenses have to be applied. Several major US banks are well aware of the problem and have begun to move their staff and assets gradually to the EU as early as 2016 after the Brexit referendum.

Nevertheless, as London still has a large customer base, the cost of relocation is high, and the negotiations between the UK and EU have extended repeatedly, many financial institutions have just played it by ear and the actual rate of relocation is therefore not very high. Moreover, financial transactions in Europe, from global loans, foreign exchange, crude oil to derivatives, mostly took place in London. There is still a large gap between London and other EU cities in terms of the scale of financial transactions. London’s role as the leading financial center in Europe will not be undermined in the short term. However, since the provisional trade agreement does not cover financial services, the UK and EU are bound to continue to negotiate on financial regulations. In particular, the UK must prove that its regulatory standards are in line with the EU levels. This will be another test for Boris Johnson’s negotiating team, and the negotiation results will affect the future of London’s financial industry.

Of course, Boris Johnson has to face more problems than this. How to revive the British economy, which has been hard hit by the pandemic, will get him bogged down. According to the Bank of England’s economic growth forecast, the UK’s GDP will shrink by 11% this year, the largest decline in 300 years, and the forecast for next year has been revised down repeatedly. The future outlook is not optimistic. If negotiations with the EU on financial regulations do not help to maintain London’s market influence, the vision of returning to the glory of an empire on which the sun never set through Brexit will only be a fond dream.

(Wang Chia-wei, Chief researcher, Taiwan Academy of Banking and Finance)

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