How would a Brexit affect the banking and finance sector in the UK?

Financial services represent around £26bn or 57.5% of the City of London's total income and accounts for 7.5% of the total national income of Great Britain; 18% of cross-border lending is arranged in the UK and over 250 foreign banks are in London. A Brexit could threaten the City of London's well established reputation as detailed below.

Finance transactions

The impact of a Brexit on finance agreements is likely to be limited: choice of law and parties' rights and obligations should remain the same. Specific Brexit provisions are unlikely to be accepted and may be counterproductive, given that there would probably be specific post-Brexit legislation.

However, a Brexit may adversely affect some businesses, which could potentially trigger a material adverse change. This would likely constitute an event of default and entitle a lender to terminate the loan agreement and enforce its security. Due to the uncertainty and financial volatility caused by the referendum, businesses may experience a drop in income with the slowdown in market activity as customers hold off on spending and investing. In the long term, businesses will be affected if they can no longer rely on free movement of goods, capital or people. Additionally, lenders may suffer increased costs with the introduction of new laws or regulations.

Insolvency proceedings

Furthermore, a Brexit may well push debtors into insolvency and therefore lenders will be concerned about how enforceable their security is.

For insolvent entities domiciled and trading only in the UK, the effect of a Brexit would be limited as UK insolvency legislation is not derived from EU law. The future of multi-jurisdictional insolvencies however is more uncertain.  

Where an insolvent entity has its main centre of main interests within an EU country, the EC Regulation on Insolvency Proceedings 2000 (the EC Regulation) applies (soon to be replaced by the "recast" Insolvency Regulation 2015). The EC Regulation governs the jurisdiction for a debtor's insolvency proceedings, the applicable law, and provides automatic recognition of those proceedings in other EU member states. If the UK were to leave the EU, the EC Regulation would cease to apply to it.

Despite this, a Brexit would probably not be severe enough to stop debtors and lenders from choosing to use English insolvency and restructuring procedures (i.e. the choice of England as the forum for such proceedings). Particularly given that one of the main tools – the English scheme of arrangement – is not covered by EC Regulation.

Access to European markets

Access to European markets is currently permitted via "passporting" rights under EU legislation. These rights give UK-based financial institutions the ability to sell products and services into other EEA member states. Without them, institutions may need to explore whether their business streams should be moved to other hubs within the EU.

Similarly, EU legislation currently enables an issuer of debt securities to "passport" its prospectus offering of debt securities to other EEA member states. If the UK was unable to agree any equivalent arrangement, a UK issuer would find it more difficult and costly to market its securities in Europe, as the EU could block access to the market entirely in relation to certain services (e.g. some retail products and euro trading). If the UK's ability to access the single market for financial services is not preserved there could be significant consequences for the banking and finance sector.