Brexit’s impact on Asia

June 29, 2016

The United Kingdom’s decision to exit the EU stands as one of the greatest financial and political decisions in generations, and the impacts will be felt not just in Europe, but around the world for years to come. There is still much confusion and no small amount of unknowns as to how the future will unfold, exacerbated by the Prime Minister David Cameron’s resignation hours after the historic referendum, leaving the UK facing a tumultuous and uncertain political landscape.

The coming weeks and months will be fraught, and the Government faces an uphill challenge in steadying a country rocked by a decision that almost no one thought would actually occur. Some are predicting that the non-binding nature of the referendum will be seized upon by the new British leader to stall for time while sense can be made of the decision. Others say that such a path undermines the democratic fabric that is so inherent to British – and European – society.

What is certain is that whatever future Britain moulds for itself in Europe, there will be some impact on its economy, and in particular the financial services industry. This article looks at some of the short- to mid-term implications of last week’s news on the financial services industry, its impact on talent, and in particular asks if there is a silver lining in all of this for Asia?

A new future

The financial services industry in the UK accounts for around 10% of the country’s GDP, with associated professional services contributing a further 5%. According to the City of London, the UK is “the world’s largest exporter of financial services”, and is regularly rated as the top financial services centre. Around 2 million people are employed in the financial services industry, or associated professional industry, and London has become the defacto global hub for everything from foreign exchange trading to hedge funds and wealth management.

This centrality to global finance was demonstrated hours after the Brexit vote in the world’s leading stock exchanges. Market reaction was swift, with the Dow Jones, Hang Seng Index and the London Stock Exchange all down more than 3% in the hours after the vote. Financial services stocks, including major banks and insurance firms, were noticeably hit – down 10% or more in some cases – while in the foreign exchange markets Sterling plummeted across the board.

Although recoveries were made, reverberations are continuing to be felt around the world, and are likely to continue for some time until a firm plan emerges from Europe. The outlook for Britain itself is bleaker, with all ratings agencies reacting negatively and downgrading Britain, impacting future debt raising costs for both the government and UK companies.

Immediate impacts

A report from PwC for industry body TheCityUK earlier this year predicted that a Brexit could lead to a decline the gross value of the financial services sector in the UK of up to 9.5%, with an estimated 100,000 job losses by 2020. However, it also maintained that the industry would still grow under a Brexit scenario, although not as quickly as it would if it had remained in the EU.

This uncertainty is again reflected by the reports that global banks and asset managers in the UK are already drawing up contingency plans to relocate staff and functions to alternative financial centres as the UK’s role as “passport to Europe” is clouded with uncertainty. Certainly, the proposed £20bn merger between the London Stock Exchange and Germany’s Deutsche Boerse now looks uncertain. And investment or expansion plans into the UK, particularly from Asian financial players in the financial services sector, will be delayed.  For example, the plans for linking the London and Shanghai exchanges will now most likely face delays while both parties assess the emerging new legal framework.

As May Tung, Managing Partner, Asia Pacific Financial Services Practice at DHR says, “We do not expect huge employment shifts in the next three months. That said, we do expect all the financial institutions - including banks, insurance companies, asset managers, securities firms, private equity firms and hedge funds - to make new strategic plans in terms of recruitment, review business and functional locations and possible relocations.”

The main beneficiaries are likely to be other European financial centres as companies look to stabilise operations and maintain access to the global financial markets. According to Stephane Rambosson, DHR’s European Head of Financial Services & Managing Partner UK, the uncertainty caused by the British vote could be seized upon by other markets to lure nervous institutions away from London with the promise of both stability and access to Europe.

“This is a unique and historic opportunity to upsize other European locations like Dublin, Warsaw and Lisbon, particularly when it relates to mid- and back-office functions such as technology, fintech and risk management. Luxembourg, for example, would be a huge benefactor from an asset management industry keen to shore up its operations, at the expense of London. Paris and Frankfurt would also benefit from the relocation of regional functions back to home offices, as well as the likely requirement to create front office platforms within the EU to be able to passport within the region.”

Although there are likely to be minimal impacts on employment and talent acquisition in the very short-term, the medium-term is less certain. Companies are already reviewing their plans for FY17, and it should be expected that all mid- and back-office functions will see both their hiring and location plans impacted. This uncertainty is likely to start manifesting itself from 2017 onwards, and will likely continue for several years until the full extent of the Brexit becomes clear. “This is a unique excuse for banks to drastically restructure and rebalance operations substantially based on cost and regulations,” added Stephane Rambosson.

The Asian opportunity

The ripples from the British referendum reached Asia almost immediately, with 8% wiped off Japanese shares and the Korean market plunging by 3%. But the reaction from governments and central banks across the region was swift, and the announcement of stimulus measures to shore up economies saw many markets make recoveries. Although the markets are still volatile, the response has calmed investor nerves to some extent certainly in the short-term.

So what does the future hold for Asia in a post-Brexit world? According to May Tung, there is a silver lining to the upheaval in Europe. “I am optimistic. We expect to see increased talent mobility across the region. With all these uncertainties, UK and/or European talent will be more open to overseas and cross continent opportunities. In particular, I can see locations such as India, Malaysia and China benefitting from mid- and back-office growth when international institutions review their global needs. For example, we anticipate more European applicants post-Brexit for the CEO and related senior management assignments that we are currently conducting for a new financial regulator in Hong Kong. I can see this trend increasing as more firms use this opportunity to strengthen their talent and boost their competitiveness.”

In particular, fintech looks likely to be one of the major areas that benefits from the Brexit. The industry has been growing at a record pace in Asia in recent years, with $4.5bn invested in financial start-ups in Asia last year alone. Hong Kong is now one of the fastest growing startup ecosystems, and plays host to major industry events such as tech conference RISE, which draws more than 5,000 attendees.

Kelvin Pang, Associate Partner of DHR in Hong Kong, indicated that this trend would only continue. “The demand for fintech in Asia has been growing in the last 18 months, particularly in the banking and insurance sectors.  Both local and international players are eager to upgrade technology infrastructure as well as build new digital analytics capabilities. There is a shortage of fintech and related talent in Asia currently, and the UK, Europe and the US are typically rich hunting grounds for such talent pools. Post-Brexit, we anticipate UK and European tech talent could be more open to relocation than before.”

May Tung adds: “The demand for fintech talent goes beyond the financial services sector as non-financial players like Alibaba's Alipay, Yu'e bao (the money market fund) and Tencent's WeBank have made forays into e-payments and on-line banking.  Such disruptions have raised the bar for traditional players to follow suit and keep pace with change or face disintermediation.  More players from within and outside the financial industry are competing for a share of consumers' digital wallets.  Digital/technology professionals who could translate digital analytics into business reality, capturing consumption with new or creative products, are in strong demand.”

She further concludes: “We anticipate no negative impact on Asian employment from Brexit in the short-term.  The disruptive changes in the financial services consumer landscape in banking, insurance and asset management will continue.  China continues to be a growth magnet, with a host of inbound new opportunities due to regulatory liberalisation in different financial services sectors such as securities and insurance companies and asset management firms.

“Outbound Chinese financial institution investments will also continue as they have built presence overseas, such as in Hong Kong.  Such expansion would draw on a diverse talent pool in front, mid and back-offices. Meanwhile, local markets in SE Asia see the need to catch up with technology to reach larger consumers, while remaining competitive on the global stage. For all these reasons, fintech remains a hot topic, and hence the demand for such talent will continue in Asia for the foreseeable future.”