The UK’s official request to the European Union to start negotiating the finer terms of Brexit in a two-year run has added fuel to another race: For the coveted crown of London’s role the global financial hub.
The “City”, home to over 250 foreign banks and the Lloyd’s of London insurance market, now faces a crisis as firms debate whether to shift jobs to continental Europe to keep serving customers there after Britain leaves the EU in 2019.
Amid many a doomsday prediction, an EY report forecasts a loss of 232,000 jobs financial jobs in Britain as result of Brexit. Goldman Sachs is planning to move up to 1,000 people to Frankfurt, while Morgan Stanley has set its eyes on both Frankfurt and Dublin.
A central theme of the grant Brexit narrative is the “passporting rights,” that entitles companies authorised in one country of the European Economic Area – currently comprising the 28 EU states plus Iceland, Liechtenstein and Norway – to sell their products and services throughout the bloc, accessing a $19tn integrated economy with more than 500mn citizens.
Close to 87% of US investment banks’ EU staff live in the UK, which also boasts 78% of the region’s capital markets activity, says New Financial, a research group. According to consulting firm Oliver Wyman, around a fifth of the UK banking sector’s annual revenue – between £23bn and £27bn – is based on passporting access.
The Financial Conduct Authority estimates that about 5,500 UK firms use passporting to do business on the continent, and that 8,000 companies based in Europe use it to access the UK.
For sure, a hard Brexit deal with the loss of passporting rights will tempt cities such as Frankfurt, Dublin and Paris – after decades of falling behind – to challenge each other for the City’s business.
Make no mistake, London’s allure is not going to fade that soon, that easily. It enjoys several big advantages over its European rivals, including a lightly regulated labour market and a legal system that (by EU standards) offers clarity and certainty, according to a Bloomberg column.
Europe’s rival centres should keep their hopes in check, too. Some banks may use Brexit as an opportunity to downsize their European operations, shifting work to Hong Kong and New York instead.
London has retained the mantle as the world’s top financial centre, though Brexit uncertainty saw its lead over Asian rivals narrow, according to Z/Yen Group’s latest Global Financial Centres Index published in March. Frankfurt and Dublin are ranked 23rd and 33rd respectively, while Paris came in at 29.
Brexit is the greatest disaster to strike the EU in its 60-year history and the UK capital perhaps felt the greatest shock of modern times with the vote to leave. But when service providers jostle for lead in a healthy race, customers stand to benefit, mostly.
While Europe should embrace this competition, the EU needs to ensure a level playing field and the existing rules on financial stability aren’t undermined.
London’s loss may not be Paris’ gain.