Despite some challenges, the financial services industry continues to be an exciting place for graduates to kick-start their careers. However, maximising one’s opportunities may require a zest for international mobility now that Brexit has made the City of London’s long-term future a little less certain.
FS 2020 – Trends & Opportunities
Several major trends are likely to disrupt the financial services industry over the coming years, bringing both challenges and interesting job opportunities.
- Regulatory Pressure: The industry, which is already suffering from historically low interest rates and record fines for misconduct, will have to endure continued regulatory pressures as global and regional regulators remain on track to further enhance transparency, improve governance and reduce risk across the board. It remains to be seen to what extent and in which way Brexit and the result of the US election alter the direction of travel.
- Consumer Behaviour: Consumer inertia has traditionally left banks focusing on processing financial services products rather than building lasting relationships with their customers. As millennials increasingly enter the market for financial services, firms may be forced to re-think their customer engagement model to cater for this growing market segment. Those looking to invest in an enhanced customer experience are likely to set themselves apart from the competition.
- Emerging Technology: Technology is fundamentally changing how the industry operates and engages with its customers. As digital becomes mainstream, the Cloud will turn into the dominant infrastructure model, and robotic process automation (RPA) will replace many back-office functions and repetitive activities. Customer intelligence will become the most important predictor of revenue growth and profitability. With greater technology, and the on-going accumulation of customer and transaction data, also comes the need for enhanced cyber security.
Faced with these trends, most CEOs surveyed for KPMG 2016 Global CEO Outlook reported how they already recognise a skills gap emerging. ‘For financial institutions to adapt and prosper in this ‘brave new world’, they will need to foster a culture of entrepreneurialism and technological innovation and open their doors to a generation of young and tech-savvy professionals.’ says Noeleen Cowley, Banking Partner at KPMG.
The Impact of Brexit on London as a Financial Services Hub
With the stroke of a pen, earlier this year the UK government has initiated Brexit – The UK’s exit from the European Union. The divorce proceedings will be finalised by April 2019. The impact on the financial services industry generally – and London in particular – is likely to be significant.
Losing Passporting Rights
Many commentators predict that as a result of Brexit, the UK will be cut off from the European single market. For financial institutions this would mean handing in their ‘financial passports’, thereby losing the ability to provide services across the EU from a base in London. This would be a major blow, particularly to the banking sector which would forgo an estimated 20% of annual revenue that is linked to the passport.* Other sectors may be less affected by it. For example, asset management funds and insurers who operate across Europe, tend to do so via subsidiaries already, relying less on the passporting rights.
Facing Tough Choices
Retaining the ability to passport products across the EU is an obvious priority for the industry. However, should that option no longer be available, ‘equivalence’ and bespoke agreements may be suitable alternatives. The appeal of ‘equivalence’ rests in the fact that the UK and the EU work from the same starting point, having virtually identical legal and supervisory rules already. However, it is also largely a political decision that requires consent from the Commission, and could take many years to agree. Short of ‘passporting’ or ‘equivalence’, there may be bespoke agreements. However, banks need to prepare in case there is no agreement.
The decision banks in the UK face is not an enviable one. Without a long term agreement in place now, they can either create subsidiaries to retain existing business at a lower rate of return on equity or decide to miss out on those revenue streams.
Should I Stay Or Should I Go
The success of the City of London is not dependent on complete access to the EU single market. Findings from the KPMG’s Annual Survey of Tax Competitiveness 2016 suggest that although the UK seems to be losing ground over Brexit, it still remains an attractive place to do business. Still, the loss of the financial passport could be damaging to some sectors if the Government does not negotiate effective alternative arrangements with the EU.
Despite some vocal commitment to maintain a presence in the UK post-Brexit, banks are already considering their options, especially in the face of continued uncertainty. Moreover, the Bank of England has asked financial firms to explain their Brexit contingency plans by this summer and has urged them to prepare for all eventualities.** Although London is likely to remain a dominant hub, cities such as Frankfurt, Paris or Dublin stand to gain as a result of Brexit, especially if firms are appropriately incentivised by the EU to make the move. Earlier this year, during the FT Brexit and Beyond Summit, KPMG’s Brexit Banking & Capital Markets Lead Joe Cassidy cautioned that although more competitively-priced countries could benefit from a larger slice of back-office work, overall fragmentation of the industry would only increase costs and inefficiencies.
My World, My Oyster
The financial services industry has much to offer over the coming years by way of exciting and challenging career opportunities as it works to reshape its future. Faced with volatility and major transformations, a resourcefulness and a penchant for international mobility will come in handy.
*Open Europe (2016) “How the UK’s financial services sector can continue thriving after Brexit”, http://openeurope.org.uk/intelligence/britain-and-the-eu/how-the-uks-financial-services-sector-can-continue-thriving-after-brexit/
** Bank of England (2017) http://www.bankofengland.co.uk/pra/Documents/about/letter070417.pdf
Dr Gabriele Birnberg is a Senior Manager in KPMG’s Banking Practice.