Brexit result leaves rival centres jostling for position

As policymakers in Europe’s financial centres begin to draw up strategies to take advantage of the UK’s unexpected vote to exit the EU, banks are weighing up the advantages of different operational bases.

Before the vote, outspoken JP Morgan chief executive Jamie Dimon warned of a “massive dislocation” to London’s financial hub. This, he said, could reverse decades of growth for international banks in London and scatter them across Europe and the rest of the world. 

He stated his own bank would scale down London operations and set up new ones in Europe. Before the referendum, banks including HSBC and Morgan Stanley stated they would move people from London to Frankfurt or Paris, some approaching regulators to secure licences and lining up executives to relocate. 

What is particularly concerning UK financial firms with significant cross-border activity is potential loss of access to the single market and passporting rights, which currently allow them to sell products and offer services to the rest of the European Economic Area, while only having to follow one set of regulations. This enables them to save substantial costs of having to set up headquarters in each country across the EU, and having to comply with local regulation.

Ease of access to European skilled workers would likely be lost too, and a requirement for visas and work permits may create barriers that could weaken the UK, while strengthening other financial centres.

Limiting EU immigration was at the centre of the Leave political campaign, although European workers have contributed to fuel Britain’s economic growth. Recent research from University College London shows European migrants pay in more in taxes than they take out in state benefits.

The subsequent slowdown of the UK economy, indicated by sharp falls in July’s Purchasing Managers’ Indexes (PMI), which drove the Bank of England to cut interest rates and expand quantitative easing, is also concerning.

But people tend to underestimate British strength and resourcefulness, believes Eric Syz, CEO and main shareholder of Switzerland’s Syz Group. “The British are very independent thinkers, have always been extremely resilient, resourceful and entrepreneurial for many generations, and will be able to negotiate a deal with the Europeans, which most likely is going to be impact the UK less negatively than most anticipate today,” suggests Mr Syz. 

The success and resilience of Switzerland, a non EU-member country, show there are ways around passporting rights, through bilateral agreements with European countries, while qualified workers have always been welcome to the country, he says. 

“There is no reason” why knowledge and execution capabilities will have to move elsewhere, he believes. While Paris may be rolling out the red carpet to welcome bankers and investors considering fleeing the City, there is a certain credibility gap across the Channel.

The French have been bashing bankers for many years, says Mr Syz. They have constantly complained financiers were making too much money. But now, all of a sudden, they are offering them tax breaks. The question is: how will those go down with the French population, used to the long-term sceptical approach to business of their rulers? Will this potential credibility gap lead to further problems for the politicians, whose public are fond of long holidays and fierce protection of workers’ rights? 

France has to reform its income tax regime, because the cost of employing people in France is “ludicrously high”, states James Quarmby, partner & head of Private Wealth at law firm Stephenson Harwood. 

Despite recent French triumphalism, Frankfurt, despite Germany’s higher corporate tax and complex labour laws, could prove a more attractive destination for financial firms.

What Brexit has definitely spurred is competition between financial centres based on corporation tax rates. The high French rate of corporation tax, at 30 per cent, has been a key factor for French businesses to set up in the UK, which is further reducing its rate of 20 per cent to 17 per cent by 2020, and potentially lower to 15 per cent. 

The UK now needs to be “super competitive” to draw new business, says Mr Quarmby. Even internally, there is competition from Northern Ireland, which recently announced its intention to reduce corporate tax to 12.5 per cent in 2018. Switzerland has got all the relationships in the EU, is an established banking centre, but is “fantastically expensive to operate in”. 

Luxembourg claims it has no intention to exploit the uncertainty caused by Brexit to steal London’s crown as the leading financial centre in Europe. At least that is the official line from Luxembourg for Finance, the agency for the development of the financial centre. In reality, many Luxembourgers are rubbing their hands at the boost the changes could give them. And even the agency’s chief executive, Nicolas Mackel, admits he will be welcoming asset management, private banking and fintech businesses considering shifting part of their workforce into the EU. 

But it is important to take into consideration the scale and ability of other European financial centres to absorb new talent. If tens of thousands were to leave the UK, none of the other European financial centres would be in the position to accommodate their children into English-speaking schools. What is certain is many financial firms are still sitting on the sidelines, waiting to see what happens.

“We will not really see any strategic position being made by financial firms until there is more clarity on the Brexit agreement,” says Christian Edelmann, global head of wealth and asset management at consultancy Oliver Wyman.

What everybody is waiting for is not just what type of deal the UK will be able to strike with the EU, but also the political unity in reaching that deal, says Michael Maslinski, partner at international multi-family office Stonehage Fleming. One of the biggest risks is a “big fudge”, where the UK gets neither the benefits of being in the EU nor those of being out, he says.

While wealth and asset managers often thrive in times of uncertainty, financial centres need to provide a safe and predictable environment in order to keep clients for the long-term. Currently, few of Europe’s potential champions are providing a convincing story.