01 September 2017
BY CHLOE O’HEA and SHARIKA NILES
London has always a been a world leading financial centre and still is a crucial player with regards to the dominance of the financial services industry compared to its counterparts. To put it into perspective there are currently 251 foreign banks that are based in London. More US dollars are traded in London than New York and more Euros than in every other city in Europe combined. Factors such as the UK’s access to the single market, passporting rights and the US-UK trade deal within this current Brexit transitional period will all be contributory to whether London will be able to sustain its status as the ‘largest financial centre globally’.
The pivotal signing of Article 50 Treaty of Lisbon on 29th March 2017 which cemented Britain’s decision to leave the European Union marked a turning point in the ‘Brexit process’. Although the impact of Brexit is not yet certain, the banking industry will undoubtedly be focusing on London’s role as a major financial centre. The inevitable change of the UK’s legal regulatory landscape and the potential opportunities that other European cities may hold for global banks will be the key themes discussed.
Effect of Brexit on regulations
Since 1999, the EU has consecutively launched a number of regulatory initiatives, aimed at ensuring integration of EU financial markets. Simultaneously, legal barriers which ‘held up’ the provision of financial services activity across borders were removed. These initiatives formed a ‘single market’ by enabling banks and financial services firms in one member state to carry out business in another member state without consent from a separate host state. This is called ‘passporting’.
The potential loss of the passport system in the UK post-Brexit is likely to cause a movement of global firms’ EU headquarters away from London. For example, a UK based bank might use its Markets in Financial Instruments Directive (MIFID) passport to help a business in another EU state take a derivatives position to hedge a loan, debt issuance or exchange rate exposure through London-based markets. Without these passporting rights, the ability to provide these cross-border services from the UK to businesses in the EU would be limited and will have a profound effect on financial institutions based in the UK.
The loss of the UK access to the single market would consequently equate to the risk of losing passporting rights. Many banks based in London have an “EU passport” which they can utilise to operate freely across the EU whilst also having their operations predominantly based in the UK. François Villeroy de Galhau, a member of the governing council of the European Central Bank has warned “If tomorrow Britain is not part of the single market, the City cannot keep this European passport”. This has arisen after the resignation of a key influential figure, Lord Hill, Britain’s EU commissioner. Many have stated that this could confirm fears that national economic growth could potentially stall as a result and could implicate vastly negative long term impact with Britain, more likely than not heading into another recession.
If the government keeps to its aggressive timetable on leaving the European Union and the trading block within the next two years, banks will certainly not have time to plan for changes to cross-border agreements. As a result, many are already shifting functions out of Britain.
Future opportunities for ‘Global Banks’
The question is where are banks going to go?
Many European cities are now becoming attractive locations for banks and businesses who are concerned that Brexit may disqualify British institutions from selling services into the EU, particularly due to the loss of passport rights. Frankfurt and Dublin are emerging as the biggest attractions with Paris and New York closely following.
Dublin in particular is a main attraction as it levies some of the lowest tax rates in Europe, is English speaking and is within the EU, meaning banks can continue to have access to the single market. JP Morgan has recently just purchased a £100 million office in Dublin to house staff as it moves out of London as a result of Brexit. It comes after the company announced plans to transfer up to 1,000 London jobs to Dublin, Frankfurt and Luxembourg in a bid to secure its EU business.
Frankfurt is another popular option. Goldman Sachs Group Inc. is considering moving some assets and functions there in order to keep access to the European market. Goldman is planning to move as many as 1,000 employees, including traders and senior managers to Frankfurt. The FT reported in October that ‘Germany is keen to peel banking industry jobs away from Britain and that it is making changes to its working law to make it an attractive alternative to London’.
Paris too is another attractive city to relocate to for banks; it was reported soon after the referendum that HSBC would move up to 1,000 euro-clearing jobs from London to Paris.
A non-EU destination for London’s lost financial services jobs is New York. The chairman of Lloyds, John Nelson stated ‘there is no way in the EU there is a center with the infrastructure to take the role London has, there is only one city in the world that can, and that is New York9. President Trump also expects to strike a US-UK trade deal quickly post Brexit following Brexit talks at the recent G20 Summit. This move, however, could potentially benefit London as it could advance the UK’s ability to trade internationally more freely.
Advocates for Brexit have argued that upon leaving the EU, the UK will be free from the restraints of EU-derived regulation. The EU’s influence will not, however, instantly be stripped from the statute book. It will depend on what the UK Parliament, Government and court regulators choose to do with existing UK laws that are derived from more than 40-years membership. The UK government’s ability to affect material amendments or to remove laws entirely will depend on the Brexit model adapted.
It is clear that Brexit is starting to challenge London’s role as the European city of choice for banks. With Frankfurt being the financial capital of Europe’s biggest economy and home to the European Central Bank, Dublin with its attractive corporate tax rates and Paris being home to many skilled financial professionals, London’s status as Europe’s financial hub is already being threatened. As discussed previously, it is the loss of the passporting rights and change of legislation which ultimately is going to cause this relocation of multiple banks away from London.
Uk Cities: A Look at Life and Major Cities in England, Scotland, Wales and Northern Ireland, William, 2010