The stakes are enormous.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
With just 80 days remaining until Brexit Day, March 29, nerves are fraying on both sides of the English Channel. Nowhere is this more true than in the City of London where the Square Mile’s dominance of the global financial industry faces its biggest threat in decades. In the City’s worst-case scenario — a crash-out Brexit on March 29 — London-based firms that have not prepped properly for this outcome could be cut off from the continent altogether.
Since moving key operations and staff across the channel is a costly, complex, timely undertaking, many companies have preferred to play a waiting game. But the clock continues to tick down, and as the risk of a disorderly exit grows, inaction is becoming a risky strategy.
Since the EU Referendum in June 2016, only 36% of the financial services companies in London have said they are considering or have confirmed relocating operations and/or staff to Europe, according to the latest edition of Ernst&Young’s Brexit Tracker (which monitors 222 financial services firms in the UK). This rises to 56% (27 out of 48) among universal banks, investment banks, and brokerages.
A total of 20 companies have already announced a transfer of assets out of London to Europe. “Not all firms have publicly declared the value of the assets being transferred, but the Brexit Tracker has followed public announcements worth around £800 billion ($1 trillion),” the report says.
This figure echoes findings by a study published in November by German trade group Frankfurt Main Finance (FMF), which estimated that London is poised to lose €800 billion ($900 billion) in balance-sheet assets by March 29. According to German Bank Helaba, Frankfurt alone has attracted 25 lenders looking to move part of their operations out of the City of London, including Barclays, Lloyds Banking Group, Citigroup, Morgan Stanley, Credit Suisse, UBS, Nomura and Standard Chartered Bank.
Over the last quarter, 30% (67 out of 222) of firms monitored by E&Y’s Brexit Tracker confirmed at least one location in Europe to which they are moving, considering moving, or adding staff and/or operations, up from 25% last quarter. Dublin is the most sought after destination, with a total of 27 companies confirming they are moving or adding staff and/or operations there, up from 21 last quarter.
Paris has also gained in popularity, with 15 companies confirming they are moving or adding staff and/or operations to the French capital, up from 10 last quarter. Just four days ago Chubb European Group, one of the world’s biggest property and casualty insurers, became the latest financial firm to redomicile its businesses from London to France.
The City has suffered two even bigger blows in the last two months. In November U.S.-based CME group announced that it was shifting its European market for short-term financing, the largest in the EU, out of London to Amsterdam. Then in December, Union Investment, Germany’s second-biggest asset manager with over €330 billion euros under management, announced it would close existing euro-denominated swap trades at London’s LCH Ltd.
It’s not hard to see why London-based firms are increasingly getting cold feet — or at least a cold toe or two! Even if, by some miracle, Theresa May’s universally loathed Brexit deal is passed by parliament on January 15, UK-based financial firms will lose the passporting rights that for decades allowed them to trade freely across the EU. Instead, they will be subject to a so-called “equivalence” regime, which lets firms from non-EU countries adjudged to have similar financial regulations do business with the bloc.
But the system is sketchy, subject to change, and can be withdrawn by Brussels at virtually the drop of a hat. It will also be available only to certain parts of the finance sector such as securities trading. Wholesale and retail banking, retail investment funds, payments and insurance brokers will all be excluded. It’s also unclear what will happen to London’s highly lucrative clearing business over the long haul.
Yet — barring a humiliating Brexit policy U-turn by the May government that includes the withdrawal of article 50, and thus walking back from Brexit — that is as good as it’s likely to get for the UK’s financial services industry, which currently provides around £250 billion pounds each year to the UK economy and employs more than 1.1 million people.
That said, London’s financial services are yet to suffer the mayhem that was widely forecast to follow the Brexit vote. The dire predictions by economists, bankers, and financial consultants that tens of thousands of financial-sector jobs would uproot to the continent have not come to pass. Most big bank relocations are in the low hundreds rather than the thousands. Even E&Y concedes that £800 billion of balance-sheet assets is a drop in the vast ocean of assets owned or managed by City-based firms. The U.K. banking sector alone is estimated to have almost £8 trillion in assets. And heavy breathing is underway in the UK parliament to avoid a no-deal Brexit. But if the parliament fails in that task and the UK crashes out on May 29, well, then, some of the math have to be revised. By Don Quijones.