Brexit: Bad News for Remittances

The British public’s shock decision to leave the European Union (EU)—‘Brexit’ in case you’ve been under a rock—has wide-ranging implications. Others at CGD have talked about how Brexit might affect development policy in general and free trade in particular. We have been working on the connections between financial services regulation, financial inclusion, and poverty. A big part of this work focuses on remittances. The money sent home by migrants to their families is a source of development financing three times the size of all official development assistance and less volatile than private capital flows. As the UK is estimated to be the world’s fourth largest sender of remittances, and well within the top 10 senders to developing countries, the implications of Brexit for UK remittances are a significant development concern.

Of course, nobody currently knows what the UK’s new arrangement with its EU partners will look like. In any case, there will be no change in institutional arrangements for at least the next two years. However, the chance that the UK will not exit the EU seems very low, with the effects of people’s expectations for the UK already being felt keenly in global equity and currency markets. Below, we explore the implications for remittances of some plausible consequences of Brexit.

A weak pound means a drop in remittances

Most obviously, there are implications from the weakness of pound sterling for the value of remittances sent from the UK. The pound lost 9 percent against the US dollar in first two days after Brexit. And while it’s recovered slightly since then, most analysts predict the pound to fall further before the end of the year. This drop will reduce the value in local currencies of the remittances sent by UK remitters. There is some evidence that migrants may work harder and sacrifice other spending to make up for some of that shortfall, but a likely 10 percent decline in the value of the pound over the next two years would still equate to a very significant drop in the value of remittances from the UK.

Recession means a drop in remittances

Furthermore, any long-term damage to the UK economy will be bad for migrants’ earning potential. If the UK economy grows much slower than previously forecast or enters a recession, this will also hit the value of remittances. Unfortunately, it seems likely that the UK economy will at best stagnate over the next two years.

Passporting for financial services

Another threat to remittances arises from the risk that the system of ‘passporting’ for financial services between the UK and the rest of the EU might break down. Passporting is a means by which banks, remittance companies, and other financial firms based in one country in the European Economic Area (EEA) are automatically cleared to offer their services to clients in another country. The EEA is the economic union among all countries in the EU, though there are some EEA countries that haven’t opted for the deeper level of integration of the EU.

If the UK were to leave the EEA, then it is highly likely that UK-based financial firms would lose their right to passport their services to the rest of the continent. Our back of the envelope calculations indicate that UK-based remittance companies manage a network of over 40,000 remittance agents across the European continent as well as provide more than half of all remittance services listed in the World Bank’s Remittance Prices Worldwide database. Without passporting rights, many UK companies will be unable to offer these services in European countries. This would be bad for competition: remitters would have fewer choices of services and perhaps, at the margin, have to face more expensive and/or lower quality products.

In order to keep passporting for financial services, Britain could stay in the EEA despite leaving the EU. That outcome seems unlikely, though, as the most likely candidates to be the next prime minister are both committed to restricting EU migration, which is not allowed in the EEA. It is rumoured that the French are seeking an ‘EEA-’ deal that offers Britain migration restrictions in return for access to the single market without passporting.

Consumer protection regulations

If Britain were to leave the EEA then it would no longer be subject to the Directive on Payments Services (PSD). This directive establishes the set of regulations that create the single market for payment and includes, amongst other things, a host of consumer protection requirements that require remittance businesses to provide customers with information about the exchange rate they are receiving. While the PSD came into force in 2007, a new PSD 2 will enter into law in EEA states by 2018. This has the potential to further improve the quality of service being offered to remitters by providing innovative companies with the means to develop products that could, for example, provide access to multiple financial products from multiple providers in the same place. A related piece of legislation, the Payment Accounts Directive, may go some way to assuaging fears about the debanking of remittance providers (and consequent reduction in the quality of their service) by enshrining in law, the right to a bank account. All of these pieces of legislation may possibly cease to apply to the UK in the advent of Brexit, hurting migrants who want to send money home and hurting families that are recipients of remittances from the UK.

Silver linings are weak and unlikely

As our colleague Owen Barder has pointed out, there are some possible silver linings for the global poor in a well-managed Brexit scenario. It is just possible, though highly unlikely, that the UK will restrict migration from the EU and allow slightly higher numbers of non-EU nationals to migrate. Such a policy was occasionally advocated by Leave campaigners. This could boost remittances to countries outside of the EU, including some developing countries.

We don’t know whether Brexit will come to fruition, and what form it will take. However, it seems unlikely to be good news for the hundreds of thousands, perhaps millions, of families in developing countries who are helped by remittances from migrants in the United Kingdom.