Will the service sector suffer with Mrs. May’s deal?

Thousands of firms and millions of jobs depend on the £423bn annual trade in goods between Britain and the EU. Mrs May’s compromise Brexit deal looks designed to help safeguard them. It is based around a "common rule book" which will mean that the UK will trade under EU rules, although – not being an EU member – it will have no part in writing them.
The CBI and British Chambers of Commerce have responded positively to Mrs May’s Brexit plan. They believed the compromise deal provided security for manufacturers, and cited Airbus, BMW and Jaguar Land Rover, who had warned they would reduce their UK operations if Brexit led to customs and trade disruption.
But the PMs problems are not over yet. Leaving aside the possibility of revolution in her own party, and difficulties in persuading the EU to accept the proposals, there remains the question of the service industries.
It’s a question that needs an answer. The UK's £1.4 trillion services sector makes up 80% of the economy.

What is the problem?

Under the proposals, the common rule book approach defines the customs arrangements for physical goods, but it will not apply to services.

The government’s thinking is clear. In the service sectors such as finance, law and insurance, Britain is a global leader, and the lead is growing. Trade deals involving services outside the EU grew by more than 73% between 2007 and 2017.

The real growth markets for financial, technology, legal and business support services are the rapidly growing ‘emerging’ economies of south-east Asia, and the global giants China and India.

To explore those markets, it would be necessary to avoid the restrictions imposed by EU rules and regulations.

A key rationale for Brexit was always that it would let the UK set its own standards and regulations. But to ensure frictionless trade inside the EU as well as outside, those standards must be recognised by the EU. This is "mutual recognition" and unacceptable to the EU, who believe it would give the UK too much of an advantage.

They may, however, accept equivalence, by which the EU would accept UK regulations in specific areas as having the same effects as its own legislation. But this is unpopular with many service companies who note that approval can be withdrawn at short notice.

Chancellor Phillip Hammond, writing in the Financial Times last week, claimed that equivalence is a practical solution. In his view, the proposals will not be an issue for the financial and related sectors, because the financial regulatory frameworks  of the UK and the EU are in effect identical. However, reactions from the City are less positive.

Strong words of protest

The deal might offer the chance to do a great deal more business overseas. However, the friction-free access to the EU which has allowed the City to build up so much of its current business would no longer be available.

"Today's Brexit white paper is a real blow for the UK's financial and related professional services sector," said Catherine McGuiness, head of policy for the City of London Corporation. It has already prompted Lloyd's of London chief Inga Beale to predict the government's plan will speed up the departure of firms from the UK. She stated that the 300-year old insurance market would go "full speed ahead" to set up a subsidiary in Brussels - and spur others on to do the same.

If your investments include holdings in the service sector, you may want to look at them in light of the latest Brexit developments. At Continuum, we would be pleased to help.

The value of investments can fall as well as rise and you may get back less than you invested.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources:

bbc.co.uk - Brexit services plan will speed up relocation, says Lloyd's boss - 12th July 2018

bbc.co.uk - The sacrifice at heart of May’s Brexit deal - 12th July 2018

ft.com - A new approach for UK financial services after Brexit - 12th July 2018

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