In the aftermath of the UK’s vote to leave the European Union, speculation has been rife about a mass exodus of financial firms from the City of London.
Paris, Brussels, Frankfurt, Amsterdam and Dublin have all been mooted as possible alternatives as international companies begin looking for new European bases on the continent.
Assuming Brexit goes ahead – the UK has not yet invoked Article 50 of the Lisbon Treaty, which it needs to do to begin the two-year negotiation period – the UK will cease to become a member state some time in the second half of 2018. That will have one major implication for the financial sector: the ‘passport’ that gives UK-based banks unobstructed access to the EU trading zone will be at risk.
Some legal analysts have argued that the passports could still be valid under articles 46 and 47 of the incoming Markets in Financial Instruments Regulation (Mifir), but it is far from clear that this is the case. And even in this best-case scenario, a whole tranche of the financial sector, including insurers and asset managers, is not protected by the passport rules.
Without the financial passport regime, the case for global financial firms basing their European operations in London is hugely diminished. According to an online job advert for a London-based head-hunter quoted in German daily Handelsblatt, 'between 50,000 and 70,000 jobs in the financial sector could be relocated within the next 12 months'.
US investment banks mull a move
Large US banks have already been weighing up the options since the UK referendum was called. Goldman Sachs chief executive Lloyd Blankfein said in a memo that the company has been planning its next move for 'many months' – though the company is building a new European headquarters in London. JPMorgan Chase is looking at moving some of its 16,000 European employees out of the UK, according to a staff memo signed by CEO Jamie Dimon and other senior executives.
Digby Flower, head of London markets at Cushman & Wakefield, takes a more measured view, pointing out that other European cities lack the capacity to absorb large numbers of City firms. However, he expects activity to be reduced in the wake of Brexit as companies take time out to adjust their plans.
'Whilst occupiers with lease events will have to make decisions, those with strategic plans will move slowly,' Flower told PropertyEU. 'Take-up levels are therefore likely to moderate and levels of rental growth to reduce.
'We do not, however, anticipate wholesale relocation of City businesses to other European centres as these simply do not have the infrastructure or stock, but there will be selective head office relocations to Europe and leakage of teams within the Investment Banking and Insurance sectors.'
Another serious concern is that London is likely to lose its status as the clearing house for euro-traded stocks. The issue was a bone of contention before Brexit, with the European Central Bank taking the UK to court, claiming that it was 'unfair' that it was effectively liable for bailing out banks that were based outside the eurozone.
When the courts ruled that such a 'location policy' violated the terms of the single market, UK chancellor George Osborne described it as a victory for Britain. But the argument will no longer be valid on the day the UK steps out of the EU. French president Francois Hollande said at a summit in Brussels on Wednesday that it was unsustainable for the clearing of derivatives and equities to take place in London.
'The City, which thanks to the EU, was able to handle clearing operations for the eurozone, will not be able to do them,' Hollande said.
Pressure on London as HQ for merged stock exhange
Felix Hufeld, head of the German financial market regulator Bafin, has also put pressure on London by saying the proposed merger between Deutsche Börse and the LSE should not be located in the UK capital. 'Without doubt it is hard to imagine that the most important exchange venue in the eurozone would be steered from a headquarters outside the EU,' he said on Tuesday.
Bafin also said London could no longer act as the clearing centre for the eurozone.
At the other end of the telescope, other European capitals have reported a growing number of enquiries from London-based companies during the referendum campaign. Amsterdam’s deputy mayor Kasja Ollongren told the Volkskrant newspaper that the city has been 'reading the signs for some time' and several firms with Dutch branch offices were looking to expand their presence to the Netherlands. That number is expected to increase now that Brexit, seen as an unlikely scenario a week ago, has become reality.
In Belgium, the prime minister Charles Michel is considering an advertising campaign to poach firms from the other side of the Channel. 'I'm not interested in paying the bill for Brexit. From now on only European and Belgian interests count for me, not British ones,' he told Het Laatste Nieuws. 'Many British companies are concerned that a Brexit will make access to the European market more difficult. In that case my message is a clear "Welcome to Belgium".'
Other European choices
As President Hollande's comments above indicate, Paris is another city that sees an opportunity to profit from London's weakened state. Before the referendum the BBC reported that HSBC had contingency plans to move 1,000 staff to the French capital who process payments made in euros.
Frankfurt, the home of the ECB, is also an obvious choice for companies seeking a move. Tarek al-Wazir, the economy minister in the German state of Hessen, has said a number of foreign banks have made enquiries in recent months. Sources quoted in the Financial Times said one US and one Swiss lender were at an advanced stage of making plans to move to the German financial capital.
Dublin, as an English-speaking city in a country with a business-friendly regulatory climate, is another city well placed to profit from an exodus from the City. Before the vote Morgan Stanley’s president Colm Kelleher suggested his firm might move its European headquarters across the Irish Sea if Brexit happened.
'We're hoping that the British voter will show sense and listen to the economic arguments and stay, but we clearly are looking at our plans,' he told Bloomberg Television prior to the referendum.
There may be one further option for companies who don't want to cross the Channel: Edinburgh. But that would depend on Scotland voting for independence and rejoining the EU as a separate nation, as Brussels has made clear there will be no 'fast-track' negotiations while the country remains in the UK.
