On 23 June 2016, UK has expressed the democratic will of leaving European Union. The outcome of Brexit referendum initiated the process that terminates the deep and special relationship between UK and EU. This relationship started in 1973, when UK joined the European Economic Community. Now, UK is expected to leave EU by March 2019, two years after triggering the Article 50 of Lisbon Treaty.

Brexit has been described as the most complex issue that UK has faced in peacetime. This process will have ramifications across society, including but not limited to citizens’ rights, security, economy, science and education. The Brexit process has been divided in two steps: divorce agreement, and future relationship. The key issues addressed in the divorce agreement are citizens’ rights, settlement of UK financial commitments, and the Irish border (Republic of Ireland - an independent country member of EU - and Northern Ireland – a member of UK). EU has made clear that no discussions are held with UK regarding the future relationship before sufficient progress has been made on the divorce agreement.

By the time of writing this article, more than half-year after the triggering of Article 50, the Brexit negotiation is considered to be at a deadlock. The key issues blocking the progress of negotiations are the settlement of UK financial commitments, the role of ECJ on enforcing citizens’ rights in UK after Brexit, and the Irish border, which is threatening the peace that has been achieved by the Good Friday Agreement.

The outcome of the Brexit process is a huge unknown. The range of possible outcomes goes from a crash out of EU to Brexit being cancelled all together. A crash out of EU would mean the exchange of goods and services between UK and EU could face high custom tariffs and high custom duties, which would hamper significantly UK economy. Additionally, free movement of people between the UK and EU would end. A visa would be required in order to travel between UK and EU. This would hamper UK’s travel market which in 2016 had around 23 million visitors, and created a revenue of around 10 billion pounds sterling, according to UK national tourism agency.

In the UK economy realm, EU is UK biggest trading partner, accounting for nearly half of the cross-border economic activity. On the Goods dimension, UK had a negative trade balance of 95 billion pounds sterling with EEA in 2014, whereas in Financial Services UK had a positive trade balance of 19 billion pounds sterling with EEA in 2014 (European Parliament, 2017). Financial Services accounts for 8% of UK national income. UK Financial Centre is the biggest in EU, accounting nearly a quarter of the share of EU Financial Services activity. Brexit poses a huge risk to the UK Financial Services market because of the close interdependence with the EU.

How UK Financial Services sector will work after Brexit is largely dependent on the nature of the future relationship between UK and EU. Currently, UK financial services firms enjoy frictionless access to the EU Financial Services market because UK is member of EU. This membership grants UK with the “Financial Services Passport”. This passport enables UK authorised Financial Services firms the freedom to provide cross-border services and to establish across the EU, without requiring a separate authorization from the host regulator.

The access to EU Financial Services market is not homogenous, depending on the type of Financial Services institution / product exists a different piece of legislation, which gives access to that area of EU Financial Services market. For example credit institutions are regulated by the CRD IV – Capital Requirements Directive IV, Investment firms are regulated by the MiFID II/MiFIR - Markets in Financial Instruments Directive II / Markets in Financial Instruments Regulation, and payments are regulated by PSD II - Payment Services Directive II – and by SEPA rules. In order to assess what is the impact of Brexit on UK Financial Services market, UK Financial Services institutions need to analyse all pieces EU Financial Services market legislation against a set of expected Brexit scenarios.

The key Brexit scenarios are the so called ‘soft-Brexit’, ‘tailor-made relationship’ and ‘hard-Brexit’. The first scenario - ‘soft-Brexit’ - can be described as an EEA membership with full access to EU single market. The second scenario - ‘tailor-made relationship’ – can be described a comprehensive Free Trade Agreement plus cooperation on several areas like the security, science, nuclear energy, etc… The third scenario - ‘hard-Brexit’ – can be described as crash outside of EU without an agreement.

(analysis in progress)