Last year, 52 percent of the UK population voted in favor of leaving the EU, a historic event branded as “Brexit.” Since then, speculation has been rife surrounding the impact of Brexit on the UK economy – particularly the financial sector.

In this article, I take a look at what the anticipated impacts of Brexit on the UK financial sector are, assess their merits and likelihood, and see what the long-lasting impact on the financial sector around the world may be.

The immediate aftermath of the Brexit vote was by all accounts bleak: stock markets plunged, sterling suffered, and consumer confidence took a big hit.

Since then, markets have recovered, waving off concerns of immediate doom for the British economy. Nevertheless, strong doubts remain on the long-term impact of Brexit on the UK economy.

One of the most discussed sectors has been the financial industry, for several reasons.

Reason No. 1 is that the financial industry is by all accounts a hugely influential sector in the British economy, contributing 12 percent to the UK’s total GDP.

Output numbers aside, it generates more than two million jobs and is the country’s biggest export industry, accounting for nearly 50% of the UK’s $31bn trade surplus in services.

The UK financial sector’s relevance to the rest of the EU is also pronounced. British banks lend nearly $1.4 trillion to EU companies and governments. Much of the financial activities carried out in Europe are either directly or indirectly performed out of London (87% of US investment banks’ EU staff are employed in London (Chart 1).

Reason No. 2 is that the financial sector has been one of the principal benefactors of the single market. The EU is strongly rooted in economic motivations.

With all this in mind, it is no wonder that the bulk of the post-Brexit doom and gloom has focused on financial services.

But six months on, my finance friends in London all seem to be carrying out their daily lives much like they were prior to the vote. So is Brexit really even significant? And if it is, what is likely to be the impact going forward?

Question 1: Is Brexit a big deal?

Unfortunately, the answer seems quite likely to be yes.

An analysis of the issues and concerns related to the financial sector bring up a raft of worrying conclusions.

In particular, these center around three important issues: passporting, regulatory uncertainty, and talent-drain.

Passporting: What is it, and why does it matter?

By far and away the most important issue at stake relates to passporting.

Passporting is the process whereby any British-based financial institution, be it banks, insurance providers, or asset management firms, can sell their products and services into the rest of the EU without the need to obtain a license, get regulatory approval, or set up local subsidiaries to do so.

Passporting, in conjunction with a few other key factors described below, has been a major reason why a large amount of financial institutions have decided to set up headquarters in London.

A recent report estimated that nearly 5,500 firms in the UK rely on passporting to conduct business with the rest of the EU. And the flows go both ways. More than 8,000 firms in the rest of the EU trade into the UK using passporting rules.

As Brexit looms, will passporting continue? The answer almost certainly seems to be no.

The only way for Britain to continue benefiting from passporting would be if it pursued a “Norwegian deal” with the EU (membership of the European Economic Area and adherence to all its associated rules).

But a Norwegian-style solution is extremely unlikely for the simple fact it would force Britain to compromise on the very same issues (specifically, immigration) that led to the Brexit vote in the first place.

So without passporting, are there other ways that UK firms could sell into the EU? One possible solution would be to go for a “Swiss deal” with the EU (essentially one focused on bilateral trade agreements).

But a Swiss-style solution also seems unlikely.

As Capital Economics points out, “It is unlikely that the UK would get a deal with the EU as good as Switzerland’s. The Swiss negotiated their deal when they were planning to join the EU; there would be less goodwill for a country leaving it”.

And even if it were achieved, there are strong doubts about the efficacy of such a model. More specifically, the “Swiss model” takes advantage of the so-called “third country equivalence” rules, which allow for non-member state firms to perform some of the same functions that passporting allows for.

But as Anthony Browne, chief executive of the British Bankers’ Association points out,

“the EU’s ‘equivalence’ regime is a poor shadow of passporting; it only covers a narrow range of services, can be withdrawn at virtually no notice and will probably mean the UK will have to accept rules it has no influence over.”

That might help explain why Switzerland has largely underperformed in the UK for the past 15 years in terms of exports of financial services (see chart 2).

If both a Norwegian model and a Swiss model seem tough, is there a third option?

The answer is yes, and would imply a single Free Trade Agreement, similar to what Canada and South Korea have negotiated with the EU.

But these negotiations are long and complicated (for instance, the Canada-EU one has taken seven years) and would in any case result in far more limited conditions than the current passporting rights allow for.

At the end of the day, the trade-off is very clear.

As Jonah Hill, formerly the UK’s most senior diplomat in Brussels, laid out, “Most approaches that offer access [to the EU market] come with free movement of people, and I can’t see that flying given the weight of immigration as an issue in the referendum debate.”

The unfortunate reality for Britain is that you can’t cherry pick. It’s either passporting (or quasi-passporting) with free movement of labor, or not.

Regulatory Uncertainty is on the Horizon

The second crucial issue related to Brexit is regulatory uncertainty.

To be clear, regulation has historically been one of Britain’s strengths, at least when assessing why London came to become Europe’s (and arguably the world’s) financial capital. For two reasons:

English law has certain practical advantages for things like debt issuance and insolvency laws.

British labor laws are much more relaxed and employer-friendly than its Continental European counterparts. (e.g. A recent article in the Financial Times quotes an employment lawyer as saying “a senior banker earning $1.5 million in total remuneration could typically be made redundant with a payout of $150,000 in London, but the cost could currently be 10 or 15 times that in Frankfurt”.)

But whilst this may have been a strength historically, Brexit complicates things considerably.

First, Britain will need to replicate or renegotiate more than 40 years of EU regulations and trade deals. This will obviously take a significant amount of time (see chart 3). And unfortunately, many financial services firms cannot afford to wait that long.

Short-term prospects look dim.

Second, timing issues aside, it’s not even clear whether new UK financial regulations would be good for the sector.

To be fair, this was actually one of the arguments that Brexit-proponents clamored for in favor of leaving the Union. Freed from the grips of excessive Brussels bureaucracy, Brexiters argued that Britain could enter into a new era of deregulation that would in fact boost the financial sector.

But the argument is not obvious.

As Capital Economics states,

“It would be wrong to assume that leaving the European Union would result in less regulation on the City. The British government has shown more zeal for regulation than its continental peers recently. Unlike those in other European Union countries, Britain’s banks will be required to ring fence their retail banks from their commercial banks from 2019. The Bank of England’s stress tests were tougher than the European Banking Authority’s last year.”

All in all, while an independent regulatory environment could indeed be a long-term benefit, the short-term impact of regulatory uncertainty might prove too much to handle for many of London’s firms.

The Dangers of Brain Drain

The third key reason why Brexit might cause long-lasting damage to the British financial sector is that it might set off a dangerous process of brain drain that would undermine one of the principal reasons London rose to prominence.

London, much like Silicon Valley, benefits from a critical mass of world-class, industry-specific talent living and working in close proximity. In a recent interview with the Wall Street Journal, the CEO of UBS made that clear: “[There are] three main reason why we’re in London. First and foremost, the talent pool.”

But would that continue to be the case in a post-Brexit world? Disruptions such as visa uncertainty for foreign employees and near-term job-loss prospects could cause top talent to go elsewhere.

On the visa-issue specifically, a recent report found that “If the current visa system were extended to EU migrants, research suggests that three quarters of the EU workforce in the UK would not meet these requirements”. This would be a huge issue for the City of London where 12% of the workforce is European (and much of it in the financial sector).

Once the the wheels are put in motion on a talent-exodus, the trend may be difficult to reverse.

Network effects are powerful and work both ways - in attracting talent, as well as in pushing it away.

The crux of it all is that talent is mobile, and whilst London currently provides the perfect set of factors to attract top talent, there are several other decent-looking alternatives ready to bite at its heals should Brexit start taking its toll.

Short-term prospects look dim.

With all this in mind, it’s hard not to be pessimistic for the UK economy going forward.

What has for many years been one of the principal drivers of growth and prosperity will no doubt be affected. To be clear, London is unlikely to collapse as a financial center, but it seems inevitable that some, if not a lot, of the capital’s financial firms will move elsewhere.

And unfortunately, it looks like it’s already happening.

Investment banks have already begun shifting, or preparing to shift, many of their back-office functions to other jurisdictions. And that affects a lot of people (chart 4).

And there is no doubt more to come.

A report by PricewaterhouseCoopers estimates that up to 100,000 financial-sector jobs may leave the country as a result of Brexit.

Question 2: What is the medium-term outlook?

London won’t slip into irrelevance but it will decline in significance

While London is likely to be negatively impacted in the short-term, there are strong reasons to believe that it won’t slip into irrelevance. There are few other cities in the world that have the same depth of infrastructure and network to sustain a buzzing financial services center.

But Brexit seems certain to take big dent out of London’s current position at the top of the global financial system.

Martin Wolf, of the Financial Times, put it nicely:

London will remain an important financial centre under any plausible circumstances. It survived the 1930s and two world wars. It will survive Brexit. Yet, within the EU, it was emerging as the undisputed financial capital of Europe, as well as one of the world’s two most important financial centres. After Brexit, it is likely to become an offshore centre, relatively more vulnerable to policy decisions, especially regulatory decisions, made elsewhere, particularly by the eurozone.

London could reinvent itself

In fairness to the Brexiters, London and the UK could actually take advantage of the situation, and turn things around. Two ways in which this could happen come to mind.

Regulatory Overhaul

First, as pointed out above, the UK might in fact be able to overhaul the regulatory environment and create an even better ecosystem for financial firms.

Removing pay caps, relaxing capital requirements, and generally ridding itself of the regulatory burdens of the EU, could help retain and even attract top talent to alternative asset industries, like hedge funds, which in any case raise much of its capital from outside of the EU and are not as affected by a loss of passporting.

New Industry and Technology

While certain firms will move abroad, new industries will emerge to replace those that leave.

As Brooke Masters, of the Financial Times, puts it:

Innovative Londoners will almost certainly [create new products and push into new markets] — renminbi-related products are an obvious place to start. Brexit could well provide the spur that banks, insurers, and asset managers need to rethink the way they do things, and create a true twenty-first century financial system that taps big data, artificial intelligence, and other new technology. It will probably be painful in the short-term, with job losses and empty office buildings. But don’t count London out.

Longer-term therefore, Britain may find ways to reinvent itself and carve out an even better situation than it currently benefits from.

Who is poised to take advantage of the short-term disruption?

Who will benefit from London’s lost business? The obvious answer is: other European cities.

Already, delegations from Paris, Frankfurt, and other Continental European cities are vying to attract business to their localities.

Recent reports state that Germany is considering changes to its labor laws to attract some of London’s firms to move to Frankfurt.

But where the next European financial capital will end up remains unclear.

In an interesting piece by the New York Times, Amsterdam and Frankfurt stood out as the most attractive replacements based on a range of criteria, including English-language proficiency, transportation and communication infrastructure, the regulatory environment, and other factors, such as schooling options, dining, and cultural offerings, etc.

But if one were to go by some of the comments of recent global banking executives, London’s decline might actually end up benefitting its principal rival, New York, the most.

The reasoning is interesting and scary: Brexit, while only affecting the UK, stokes the flames of populism around Europe and raises the spectre of a break-up of the Union. With these risks on the table, it might be more prudent to veer toward the safety of New York.

Other potential beneficiaries could be in Asia, particularly with relation to the insurance industry which could move to Hong Kong or Singapore.

Whatever the case, it seems unlikely that most of London’s losses will flow evenly to the same destination.

More likely, London’s decline will lead to a more decentralized global financial market with multiple beneficiary-cities snapping up parts of the pie that London left behind.

Ultimately, the unintended consequence of Brexit could be a new wave of innovation in the financial services industry as a broader range of players take control of the industry’s direction. The true winners will be those best setup to capitalize on this opportunity.

This article originally appeared on Toptal.