So Article 50 has finally been triggered and the process of divorce between the UK and the European Union begun, accompanied by another slew of media stories questioning the future of London as a financial capital. Banks are reportedly transferring thousands of staff away from London, while some of the continent’s capital cities are jostling to claim the coveted title of Europe’s financial centre.
So far, Goldman Sachs has threatened to move 2,000 roles and HSBC has said it will transfer 1,000 positions from London to Paris. But behind the headlines, global financial institutions have been quietly relocating back office activities to low tax European jurisdictions such as Luxembourg or Dublin for the past decade. You would be hard pressed to name one global bank that hasn’t grown its presence in Luxembourg significantly over that time. And now, Brexit provides a perfect opportunity to accelerate long-established cost efficiency programmes with new positioning.
One of the biggest concerns for asset managers is whether they will face restrictions when selling funds to mainland European retail investors once the UK is no longer part of the European Union. More than two-thirds of investment professionals believe UK asset managers will not be able to sell their funds freely across the EU following Britain’s departure, according to a poll conducted by PwC.
Some asset managers believe they can overcome this problem by establishing fund ranges in Ireland or Luxembourg for their EU clients, while offering UK-domiciled funds for British investors. London-headquartered M&G has already bolstered its presence in Luxembourg and Ireland, hoping to hold on to its mainland European clients.
But any visitor to Luxembourg can plainly see the limitations of its attraction as a financial capital.
Esch-Belval, the former mining community turned enterprise zone, is reminiscent of London’s Docklands in the mid-nineties – a few huge towers, some sandwich shops and a cinema, but largely deserted outside of working hours. Most employees commute daily across the borders from France and Germany and while the talent pool is deep, it isn’t particularly broad.
So, what about Paris as Europe’s financial capital? Paris has been marketing itself on a study showing “huge social attraction, Europe’s second busiest airport, and over four times the amount of available office space for immediate use than Amsterdam, Dublin and Frankfurt combined.”
This seems to have worked in attracting HSBC, but it’s a curious campaign that essentially advertises its unpopularity with international businesses as a good reason for global financial institutions to relocate there. Paris is a thriving cultural centre, but the operating environment for business presents many challenges, which is partly why the largest French community outside of France resides in London.
So, we turn to Frankfurt.
Home to the ECB, already full of established global banks and a regular training ground for talent that is exported worldwide. Until recently, the merger between Deutsche Boerse and the London Stock Exchange (LSE) looked set to extend Frankfurt’s influence in London. The European Commission’s objections over the LSE’s interest in an Italian bond trading platform aside, industry insiders suspect squabbles over the merged entity being headquartered in London may well have scuppered the deal.
A close look at the facts show that Frankfurt ranked 29th in the most recent report from the Global Financial Centres Index, while London once again pipped New York to the number one spot. The gap in the ratings between London and Frankfurt was as wide as the gap between Frankfurt and Mexico City.
While the two market leaders’ position ahead of Singapore, Hong Kong and Tokyo in third, fourth and fifth place has narrowed since the referendum and Donald Trump's election, they are still way ahead of their neighbouring rivals. Zurich was the highest ranked on the Continent, at 11, followed by Luxembourg at 18 and Geneva at 20. Paris ranked 23rd.
A large part of London’s appeal has rested on the City being a gateway to the rest of the EU. US investment banks have based themselves in the City and then used an EU “passport” to provide services to the other 27 nations without having to set up expensive subsidiaries on the continent.
Hopes of retaining passporting rights are dwindling, but the UK will seek to maintain a regulatory regime broadly equivalent to that of Brussels in an attempt to retain this access. The alternative would be to loosen regulation, or offer lower rates of corporation tax, to attract more businesses to the country.
Exiting the single market would cost Britain's financial services sector £38 billion, deal a £10 billion blow to Treasury's coffers and place 75,000 jobs in the firing line, according to think tank TheCityUK.
But despite the naysayers and media hype, confidence in the UK’s dominance as a financial centre remains. JP Morgan has rowed back on pre-referendum plans to move 4,000 of the 16,000 jobs in the UK abroad, instead saying it won’t move many jobs after all. Jes Staley, the chief executive of Barclays, has said the bank believes London will retain its position as Europe’s financial hub, while Unigestion, the Swiss investment house, has made similar statements.
London is unlikely to lose its status as the financial capital of Europe, but the scale of relocation will depend on the terms the government can negotiate and the overall effect on London’s economy.
The sirens of doom heard before the referendum are now changing their tune. London has the technology and transport infrastructure, the depth and breadth of talent, and the backing of the world’s most powerful financial institutions. You’d be brave to bet against it.