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Assessing the likelihood of ‘Soft Brexit’

Authored by: Synechron London Team

Over the last year British Politics has had a recognisable theme; unexpected ballots with unintended consequences - particularly for financial markets. The Global Financial Crisis exposed overzealous, risk-taking behaviours which were deemed to be against the national interest, as shown by the vast Government bailouts. Yet as financial markets have recovered, it could be argued political risk-taking and uncertainty have created a new level of volatility. Given the fact that the UK financial system has absorbed this political uncertainty, what does this say about its resilience – particularly to Brexit?

To assess the outlook for financial services, we first need to understand the current political climate and project the likelihood of a ‘Hard Brexit’ verses ‘Soft Brexit.’ To explain, a ‘Hard Brexit’ is the scenario where the UK forfeits its access to the Single Market and attempts to negotiate a bespoke trade deal. In a situation where there are unconstrained negotiating boundaries, this is a realistic ambition. The EU has forged free-trade deals with nations outside the EU bloc before; the Comprehensive and Economic Trade Agreement (CETA) signed between the EU and Canada is the most recent example of this. However, if the UK was to follow CETA as the template for a EU-UK trade deal, it would most likely be unachievable in the two-year timescale triggered by Article 50 in March 2017. CETA was agreed after a seven-year negotiating period and contains no provisions for Canadian firms regarding passporting for financial services. Canadian financial services will still have to establish a presence in the EU and comply with local regulations to serve member states freely.

 

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