EU referendum: Brexit offers a lot of risk but very little reward says BlackRock

The UK's financial services industry could face a drastic reduction in size if Britain votes to leave the European Union (EU), BlackRock, the world's biggest fund manager, warned on Wednesday (2 March).

In the event of a Brexit, potential government savings would be offset as leaving the EU "cut into the financial industry's major contribution to the UK economy, tax revenues and trade balance", the US-based fund said.

The report found that the trade surplus in Britain's financial, insurance and pension services sector currently stands at £18.5bn ($25.9, €23.9) but the challenges likely to arise should the UK choose to leave the EU could see that surplus shrink significantly.

Should Britain exit the 28-country bloc, the EU could then move to draw up new, potentially stricter, regulations for equity markets and for the financial services industry, which could be detrimental to a UK financial industry dependent on single market access.

"A Brexit offers a lot of risk with little obvious reward," said BlackRock vice chairman Philipp Hildebrand.

"We see an EU exit leading to lower UK growth and investment, and potentially higher unemployment and inflation. Any offsetting benefits look more amorphous and less certain, in our view."

Under one of the potential scenarios analysed by the fund, Britain could be excluded from the "passport" framework , which would deal a significant blow to those looking to sell or advise on investment funds within the EU.

Should such a scenario come into place, investors looking to gain access to worldwide markets through Britain could be forced to relocate their businesses elsewhere and BlackRock indicated Dublin, Paris and Frankfurt could be among the beneficiaries in such circumstances.

However, the US fund said there was a chance Britain would remain part of the framework even if it voted to leave the EU, in which case the impact on the financial service sector would be reduced.

On 1 March, analysts at Investec warned a pro-Brexit vote at the EU referendum, would be distinctly negative for the sterling because of its potential to impact the economy and international trade.

"A major concern is the threat of loss of access to European markets, something which is currently permitted via passporting rights," said John Wyn-Evans, the head of investment strategy at Investec Wealth & Investment.

"It is probable that banks would have to apply for new licences to operate on the continent, which would reduce the attraction for international banks to base their European operations in London. Any reduction in banking activity would have severe knock-on effects for London – both the economy and the real estate market."