Brexit means Brexit, whether the City of London likes it or not, writes William Wright, MD of capital markets at think-tank New Financial.
We have been tracking the impact of Brexit on the banking and finance industry in the UK over the past few years, and our latest report makes for pretty sobering reading.
The point of the report was not re-running the referendum debate or scoring political points for either side, but to establish a clear baseline so the City and the government can work out what to do next.
So what’s the damage?
We identified more than 440 firms in the banking and finance industry in the UK that have responded to Brexit by relocating part of their business, moving some staff, or setting up new entities in the EU. Banks have moved or are moving more than £900bn in assets from the UK to the EU, and insurance firms and asset managers have transferred over £100bn more in assets and funds.
Are we done now?
No, not yet. While this is the most comprehensive analysis yet of the impact of Brexit on the City, we think it is an underestimate. A lot of firms will have slipped below our radar and given that we are only at the end of the beginning of Brexit from the City’s perspective, we expect the numbers to increase over time.
Is there any good news?
Yes. This relocation activity means that most firms in the UK that need continued access to clients and markets in the EU now have it. With that access in hand, this is an opportunity to draw a line in the sand, treat Brexit as a sunk cost, and move on to focus on recalibrating the UK framework, managed divergence, and exploring partnerships further afield.
Where have all these firms gone?
We only found three firms that have upped sticks and left the UK completely. Most have them have moved whatever they need to move to retain access to the EU, and in most cases this is a small proportion of their business.
Dublin has emerged as the clear winner in terms of attracting business from the UK, with 135 firms choosing the Irish capital as a post-Brexit location, ahead of Paris with 102 firms, Luxembourg with 93, Frankfurt on 62, and Amsterdam on 48. In the longer-term, we expect Frankfurt to be the ‘winner’ in terms of assets, and Paris in terms of jobs (a lot of banks are expanding their trading floors in Paris even if their new EU HQ will be in Frankfurt).
But weren’t the forecasts on jobs ‘Project Fear’?
Yes and no. The debate about how many staff have been moved so far and whether that is higher or lower than expected a few years ago is a bit of a red herring. That said, we have identified around 7,400 staff moves or local hires in response to Brexit (not a million miles from the Bank of England’s forecast of 10,000 jobs on day one of Brexit). Our number is from only a small minority of firms, and we expect it to increase in the next few years. The bigger issue is not jobs leaving the UK but new jobs in the EU being created in future that might otherwise have been created in the UK.
So what’s the problem?
The scale of business, assets and funds being transferred from the UK is far more significant. Only a small number of firms have said what they are moving and already the numbers are very large: £900bn in bank assets is roughly 10% of the UK banking system.
This shift will gradually chip away at the UK’s influence in the banking and finance industry in Europe and around the world, as a greater proportion of business is authorised by and conducted in the EU. It could also significantly reduce the UK’s trade surplus in financial services with the EU as services that were previously exported from the UK are provided locally, and reduce the tax take from financial services.
Is it all one-way traffic?
No, in the next few years many EU firms are likely to open a new office in the UK. Our analysis of the EU firms using the current temporary permissions regime to access the UK market shows that over half of them already have a presence in the UK. Many of those that don’t are smaller firms who may decide it is not worth it. We think a likely outcome is that around 300 to 500 mainly smaller firms may open an office in the UK, much lower than the prevailing forecasts of around 1,000.
What about the longer-term impact on London?
There is no question that London will remain the dominant financial centre in Europe for the foreseeable future. Firms are keen to keep as much of their business in London as possible and even the biggest relocations represent a maximum of 10% (so far) of the UK headcount at individual firms. However, over time other European cities will chip away at London’s lead for regional business.
William Wright is managing director of capital markets think tank New Financial www.newfinancial.org