Repercussions of Brexit on UK Consumer Finance Market
May, 2017 : The process of Brexit started in the UK on 29th
March 2017 after the referendum to leave European Union was decided in June
2016. It is expected that the process should be completed by April 2019.
Initially, the country’s economy was negatively
affected by the referendum. However, since then, the economy and the stock
market has recovered significantly since past year. Moreover, the country’s GDP
also witnessed a consistent growth of around 0.6% during FY17.
The short term and long term impact of Brexit on
the consumer finance market is still uncertain. It raises questions for
consumer finance companies such as government policies, consumer willingness to
borrow and market opportunities.
United Kingdom is considered as the largest
financial center not only in European Union but across the globe. Along with
local institutions, many European finance companies have local presence in the
country. For many of the country’s local financial institutions, the impact is expected
to be negative as Brexit would leave these institutions with more restricted
access in the European Union’s finance market. Moreover, these corporations
would also face high competition from other multinational financial
institutions from countries such as China, USA along with the locally present
institutions.
City of London is considered as one of headquarters
for financial corporations and is also considered an entrance to the rest of
the European Union through a practice known as “passporting”.
Y-o-Y Change in Outstanding Consumer Loans
in European Union, 2009-2015
Factors which can negatively affect the
country’s consumer lending market are:
- High
uncertainty during the period could result in consumers saving more money
and borrowing less and declining consumer expenditure (this was also
witnessed during the financial crisis in 2008). This is anticipated to hit
mortgage and credit markets.
- Potential
loss of “passporting” mechanism (Right for a firm registered in the
European Economic Area (EEA) country without the need for further
authorization in each country).
- Significant
effect on cross-border banking services such as investment services,
deposit taking and payment services.
- Access
to skilled resources across EU nations.
- Stricter
regulations for foreign banks could lead to high taxation rates, consequently,
leading to higher interest rates.
- Many
global financial corporations could relocate their European headquarters.
- Possible
changes in the legal systems.
- Can
result in high price movements in real estate sector.
- Increase
in prices for commodities such as energy, FMCG, Tourism etc.
- Currency
fluctuations (possible decline in pound values).
- Possible
omission of financial services from the trade deal negotiated post Brexit.
According to WTO, the UK Economy could be around
USD100 billion stronger, by 2021, if UK had not left the European Union.
Furthermore, the impact of Brexit is also dependent upon the post-Brexit deal
negotiated with the rest of the bloc. Key possible scenarios of the post Brexit
deal include European Economic Area (Countries such as Norway, Iceland),
European Free Trade Agreement (e.g. Switzerland), most favored nation (e.g.
Australia). There are multitude of issues to consider, and moving forward it is
necessary for both European Union and Britain to agree upon a mutually
beneficial deal as this would be advantageous for consumer finance market in
the coming year.