June’s Brexit vote set the UK on course to leave the European single market, a decision that is set to have numerous financial, legal and bureaucratic ramifications for the financial services sector in the City of London.
London is currently the undisputed financial capital of Europe with an unrivalled concentration of banks and insurers as well as an extensive professional services ecosystem that has evolved to support them.
The City is home to the European Banking Authority (EBA) and hosts the European headquarters of a multitude of major international banks – thanks to the EU passporting system.
London is also the site of the clearing houses that dominate Euro-denominated trading and can process trades with a value of more than $1 trillion per day. Previously, the European Central Bank (ECB) has tried, unsuccessfully, to force the flow of euro-based transactions out of London and into the eurozone, and is set to make another attempt.
However, the Brexit vote saw share price falls for UK banks while the country’s sovereign credit rating was downgraded. It also means that the EBA will have to relocate while other entities may find it advantageous to follow.
Alternative European financial centres, such as Frankfurt, Paris, Dublin and Luxembourg, are all jostling for position and readying themselves to gain if London should lose out.
“Following the UK’s decision to leave the European Union, many banks and financial services firms are having to consider where best to locate certain parts of their workforce.
“Financial ‘passporting’ is vital to the work many banks undertake across Europe and they will have to think carefully about which city within the EU their interests and their clients’ interests will be best served,” said Tim Cuddeford, a member of Synechron’s Business Consulting Practice.
Around 20% of London’s banking and financial jobs, equating to 80,000 roles, could form part of a job exodus worse than all the years of the financial crisis because of Brexit, according to the Boston Consulting Group.
That would be worse than the 55,000 jobs lost in London’s financial sector during the years of the financial crisis between 2007 and 2010 and would hit several areas, including international payments transactions, investment banking and trading.
The leading alternative
As well as being at the heart of the eurozone’s largest economy, Frankfurt is already the centre of European supervision for banking and insurance. The European Central Bank, which dictates monetary policy and supervises the biggest banks, is located in the city as well as the insurance regulator EIOPA. It is already home to 200 foreign banks and is now favourite to be the joint headquarters of the London Stock Exchange and Deutsche Börse, if and when, their proposed merger completes.
Frankfurt is confident that it is the best location for the EBA and is preparing to absorb any financial sector workers that do move from London.
Pros & Cons
The area’s regional marketing agency has already aimed at welcoming finance workers while a promotional video shows off the region’s assets, and includes couples wandering through vineyards in misty sunlight and amid the gleaming glass and chrome towers of the banking district. The agency has also set up a 24-hour telephone hotline manned by native English speakers, which it says has been busy.
The perceived obstacles are the high German taxes and strict labour laws, which are off-putting for some, as well as Frankfurt’s reputation, albeit one it’s trying hard to shake, for being a little dull.
Dr Wolfgang Dorner, banking expert and head of BCG Frankfurt, said, “The economic and political stability in Germany, combined with access to a highly qualified talent pool make Frankfurt am Main a leading choice in location,
“German cities should prepare for job relocations in various industries and actively seize the opportunities offered by this influx of qualified workers. France has also promised to welcome bankers and banking operations if companies lose passporting, or the ability to do business with the whole of the EU, after Brexit.”
The other option
The French capital Paris also started preparing for the prospect of Brexit well in advance of the referendum with a conference on the subject six months before the vote itself combined with a major lobbying effort.
This has seen the city make a concerted effort to separate itself as an entity from the rest of France and its socialist president, Francois Hollande. Instead of the usual perception of France as a country with high taxes and tough labour laws, it has positioned itself as a welcoming place for bankers with a great quality of life.
The city is already a major player in the asset management sector as it is the domicile of several large operators. It is also attractive in terms of employing foreign workers, who enjoy a non-domiciled status for five years, which means their employers do not have to pay social security payments for them during this period.
Despite these efforts, some bankers remain reluctant saying the city may as well be Havana or Caracas in terms of its taxes and politics.
Elsewhere, both Luxembourg and the Irish capital Dublin have already been successful in attracting hedge fund business. Both domiciles specialise in back office functions for the hedge funds and will aim to capitalise if any relocate from London.
Longer term, Edinburgh could find itself well placed if there’s another Scottish vote on independence as the Royal Bank of Scotland, which has a major London presence, is already headquartered there.
However, research from Synechron has shown that moving banking jobs around the continent will prove a costly exercise. The company calculated its figure using estimated relocation, hiring and redundancy costs, new building and rent costs and other infrastructure & some contingency costs.
Cuddeford said, “Our calculations show that it could cost these firms on average £50,000 per employee to relocate parts of their workforce out of the UK, perhaps to financial centres such as Amsterdam, Dublin, Paris and Frankfurt.”
However, Allianz Chief Economist, Mohamed El-Erian said London would remain the second global financial centre after New York despite Brexit. “Despite stiffer competition from Frankfurt, Paris, Dublin and Amsterdam, no one will reach critical mass to challenge London’s overall European dominance.”