It may be just a twinkle in a Eurosceptic's eye, but a so-called Brexit, which would see the UK leave the European Union, is nonetheless causing increasing concern in some quarters.

The risk of a Greek exit may yet be far greater, but for Ireland’s international financial services sector, which is gearing up for its next phase of growth as heralded by the recent launch of a new strategy, it may also be prudent to consider what might happen if the UK did decide to pull away from the EU.

"I don't think anyone is sitting back and thinking this isn't happening – it is a business risk," says Sarah Goddard, chief executive of the Dublin International Insurance and Management Association (DIMA).

But, as Ireland’s international financial services sector, what impact might an EU without the UK have on the IFSC?

The opportunities

Brexit, one hypothesis goes, will force UK-based financial institutions to flee London, Manchester or wherever they might be based, to set up in an EU country in order to maintain access to the all-important EU single market.

UK insurance group the International Underwriting Association (IUA) has suggested that if the UK were to exit the EU, then "insurers and reinsurers from . . . countries such as the United States and Japan might be obliged to choose other European centres over London in order to passport into the EU", while a report from the Centre for Financial Services Innovation (CFSI) says Brexit could lead to an exodus of companies from the City of London.

It’s not just the insurance companies that might be looking for a new home. Bankers have also joined in, with Deutsche Bank saying it is reviewing its options on the Brexit potential and that it has even established a working group to help it consider whether it should move out of the UK - and to where.

But if it came to it, where might such companies go?

The Financial Times has suggested that banks such as Bank of America, Morgan Stanley and Citigroup are all considering a move across the Irish Sea, while the aforementioned CFSI report gave possible alternative locations including Frankfurt, Paris and Dublin.

It certainly makes sense: Ireland is the only other English-speaking location in the EU, it has a common law system, it is geographically close, and many of those institutions considering a move may already have some form of presence in Ireland.

At least Michael Mainelli, chairman of Z/Yen, a London based commercial think tank which produces the Global Financial Centres Index (GFCI), an index in which Dublin's performance has deteriorated considerably in recent years, thinks so. He says a Brexit could offer Dublin a chance to reverse this trend.

“If it were to happen it would be a huge opportunity for Dublin and Luxembourg,” he says, adding that UK firms will have to set up offices within the EU.

However, Mainelli says it won’t be a case of massive investment banks moving their headquarters. Rather, it will be more middle-office and middle-sized activities which might find a new home in a centre like Dublin.

And London, for example, is home to about 250 banks and 350 insurance firms. If even 40-50 of them look to set up operations in the EU, employing just three or four people, it could still translate into a boost for Ireland.

In structured finance, one potential area of opportunity is with respect to a passporting-type structure for structured finance vehicles. If one was to be created, could Ireland replicate its success in the funds sector by establishing itself as a hub for these vehicles? And if it did, would this encourage UK-based institutions to transfer some of their business to Dublin?

Earlier this year, for example, the European Commission committed to developing an EU framework for high-quality securitisation.

"It is conceivable that the commission's activity on capital markets union will lead to positive initiatives and developments in the securitisation area," says Gary Palmer, chief executive of the Irish Debt Securities Association (IDSA). "As a leading jurisdiction for the establishment and servicing of securitisation and SPVs, any and all developments that enhance the potential of these products have to be seen as opportunities for Ireland."

And there may also be an opportunity for Ireland’s international investment funds business, although potentially on a smaller scale. As the largest centre for hedge fund administration in the world, and with some €3.8 trillion in fund assets being serviced across Ireland, it’s already well positioned as a hub for the cross-border sale of funds under the UCITS passport.

Indeed, many UK fund managers have already established their fund ranges tax-efficiently in Dublin or Luxembourg, and more Irish funds are registered for sale in the UK than any other country in the world.

This means that many UK fund managers are already set up for a Brexit in a sense, in that their fund ranges are already distributed in Europe via centres like Luxembourg or Dublin, so even if the UK was to exit the EU it may not impact on the distribution of funds.

Where there could be potential for Dublin, however, is among fund managers distributing UK product, such as an OEIC, as they might find they are potentially closed out of the European market post-Brexit.

There could also be potential for Dublin to win some front-office portfolio management and services operations, something it has not done to any great extent thus far.

"There could be a temptation or incentive to move within the boundaries of the EU," says London-based Philip Warland, head of public policy with fund management group Fidelity Worldwide Investment.

A weaker London

However, on the flip side, if a Brexit was to become a reality, it could damage its financial services sector. While it is undoubtedly one of the top two – if not the top – global financial centre, and the strength and depth of its financial centre are unparalleled in a European context, a London which is no longer a member of the EU may lose its position at the top.

“The more I think about it, the more I think about the sector which will be hardest hit is financial services,” says Warland.

And a weakened London may not be good for Dublin.

After all, from its earliest days as a financial centre, promoters of the IFSC have sought to leverage on Ireland's proximity to London to win business. Pádraic White, chief executive of the IDA in the early days of the IFSC, said it was looking for a satellite relationship with London, while others highlighted the complementary role Dublin could play for London.

A survey in 2008 said that as many as 25,000 jobs which might have been in London were now in Ireland, highlighting the closeness of the two centres.

Palmer, for one, fears that if the UK were out of the EU, the strength of the relationship that has stood to Ireland so much, may diminish.

“Many SPV and structured financial transactions are done out of London,” he says. “And a lot of business that comes into Ireland comes from London. So if the business in London is frustrated or challenged this could have a consequential impact on the industry here.”

Echoing Palmer’s comments, the DIMA’s Goddard says a lot of substantial insurance business goes into the London market. And, as the city’s close neighbour, Dublin-based insurance firms benefit from their proximity.

“But if London is suddenly more distant through the political environment, then less may get seen here,” she says.

Mainelli, however, suggests that rather than damage the city, a Brexit could be a positive move.

“In my opinion, it would probably thrive on it. I’m not 100 per cent sure it would be an unsuccessful thing,” he says.

Indeed while lobby groups have been to the fore in dismissing a Brexit, Mainelli is keen to point out that financial services is a very diverse activity in the UK, and firms in the “true city” may be keen for the uncertainty and volatility a Brexit would bring.

“In times of increased uncertainty, the larger centres do better. Back in 1999 we were terrified that the euro would demolish London, but it surged after that,” he says

He notes that the centres of Paris and Frankfurt are too inward-looking to encroach on London’s dominance, as they tend to favour national firms in a way that isn’t evident in London.

But where there will undoubtedly be challenges for the UK’s financial services sector is with regards to the ability of its firms to sell across the common market. New capital efficiency rules, which make it easier for banks and insurers to access this market, may be a trickier proposition to overcome.

In this regard, the terms of a potential divorce agreement, between the UK and the EU will be key. But there are several unanswered questions about this. Would the UK join the European Economic Area, for example? Or would it behave more like Switzerland and look to come to favourable terms with the EU with regards to equivalence for its regulation? Will it look for an agreement on capital rules for banks and insurers to help them to continue to operate in Europe? And more pertinently perhaps, will Europe look favourably on the UK? After all, the UK may need Europe more than the other way around.

“We are an export market for a lot of Europe, but it’s not true in financial services; it’s pretty much a one-way flow,” says Warland.

Even if the vote goes in the EU’s favour, the uncertainty it is presenting brings its own challenges.

“While I don’t believe it likely that Britain will exit the European Union, any debate in anticipation of a vote brings a level of uncertainty and in the financial services industry anything that causes uncertainty is unwelcome,” says Palmer.