More than a year after the vote to leave the European Union, the debate is still raging over the potential impact of Brexit on the City of London – although it is often dominated more by heat than light. This is a short attempt to put some of the zombie myths from both sides of the argument out of their misery.
1) Brexit will kill the City
If you listen to some Remainers, in a few years’ time the City of London will look like the opening scenes from the movie 28 Days Later after a mass Brexodus of banks and asset managers to Frankfurt. But only around a quarter of business in the City is EU-related, and much of that will be able to stay in London. While firms will have to move some operations to the EU, the majority of their business will stay put and London will continue to be the dominant European and global financial centre. The Bank of England’s latest estimate of 75,000 job losses would be a big blow, but it’s less than eight per cent of the UK financial services industry.
2) Brexit is an existential threat to the City
Brexit isn’t even the biggest threat to the City. The collision of technology with the acceptance that the pre-crisis glory days are never coming back will force banks to automate, outsource and offshore everything they can. Brexit is the occasion and not the cause: it will concertina decisions about restructuring that might not have taken place for years. Employing thousands of support staff in London, Bournemouth or Manchester suddenly looks very expensive compared with Krakow or Riga. This process will probably cost far more jobs than Brexit itself.
3) Brexit will liberate the City from the burden of EU regulation
If you’re hoping that Brexit will liberate the City from the yoke of EU bureaucracy and lead to a bonfire of regulation, you should have a word with Mark Carney, Andrew Bailey or Philip Hammond. It isn’t going to happen. A lot of EU regulation was designed in the UK (such as the latest rules on paying for research) and the UK often ‘gold plates’ EU rules to make them tougher. There is some scope for the UK to soften some regulation – perhaps a separate regime for smaller domestic firms – but the UK has been at the vanguard of helping set global rules, and wants to stay there.
4) The EU has held the City back
While Europe is an important market for the City it’s hard to argue that it has been held back when two-thirds of financial services exports go to the rest of the world. One of the many reasons why the City’s importance has grown over the past few decades is that firms are able to concentrate their European activities in one place under Single Market rules. This means London acts as a gateway for non-EU banks and investors to access the rest of the EU. Big US and Swiss banks employ more than 60,000 people in the UK, and tens of thousands more work at big Chinese, Indian and Japanese banks.
5) Frankfurt wants to eat the City’s lunch
It’s deceptively easy to argue that Paris or Frankfurt are not going to be able to replicate overnight what the City of London has built up over centuries. After all, roughly the same number of people work in and around the City as the entire population of Frankfurt. But no financial centre in the EU has any designs on eating London’s lunch: they’re after a few mouthfuls. Paris wants to attract 20,000 jobs post-Brexit – about two per cent of the total number of people working in financial services in the UK. A few per cent here and a few per cent there will quickly add up.
6) The EU needs the City more than the City needs the EU
The City plays a vital role in lubricating the EU27 financial system and finance its economy. More than 75 per cent of all FX and derivatives trading in the EU takes place in London, and between 50 per cent and 70 per cent of all investment banking activity, equity trading and bond trading in EU27 markets is conducted in London. But the banks that conduct that business in the City today will move as many people and operations to the EU27 as they need to in order to ensure that they can conduct it in Frankfurt or Paris tomorrow. For context, UK banks’ exposure to EU counterparties is about four per cent of the total EU financial system. In the other direction, EU banks represent about 30 per cent of all activity in the UK.
7) The relocation of euro-clearing will cost tens of thousands of jobs
You must make some heroic assumptions to get to this position. Some countries would love to force the €1 trillion a day of euro-denominated clearing that takes place in London to move to the EU. The EU itself wants a bigger role in the supervision of this business (much as US regulators have joint oversight of US clearing houses in London). It would only push for relocation if it thought the UK’s supervision was too relaxed. To get to the astronomic job losses you have to assume that the EU demands that all activity related to the euro must take place inside the EU, which isn’t on the table because it would lock the EU out of the global financial system.
8) Fintech will save the City
The rapid growth in the fintech sector and London’s dominant position in Europe has been a welcome boost for the UK over the past few years and created something like 60,000 jobs. That will probably more than offset any Brexit-related job losses over the next few years. However, the point of fintech is to eat some of the banks’ breakfast: the more successful fintech becomes, the more jobs it will destroy in traditional banking. More competition and better products for consumers, but fewer overall jobs.
9) A transition period will save the City
Banks and trade associations have been warning recently that unless the UK agrees a ‘status quo’ transition agreement with the EU in the next few months, firms will have put their Brexit relocations plans into action. This transition period would involve agreeing in advance of a trade deal that for two years after Brexit the UK’s relationship with the EU would essentially stay the same – apart from the UK having no say in the rules it would have to apply. While it’s an elegant idea, to lots of people it would look remarkably like an attempt to derail Brexit.
10) A bespoke deal can be reached before we leave
If you think a comprehensive trade agreement that includes financial services – or a bespoke deal for the City – can be negotiated in the next 15 months, then I have a nice bridge that you might be interested in buying. The only comprehensive trade deal to include financial services ever agreed is the EU itself, which is a work in progress that has taken decades to develop. For context, discussions about Mifid II, the latest EU directive that comes into force in January next year, started in 2010. The proposal to develop a system of mutual recognition for UK and EU financial services regulation is an excellent idea – which I look forward to reading about in City A.M. when it comes into force in 2032.