London left in limbo as banks await Brexit fallout

Despite the twin pressures of Brexit, and its surrounding uncertainty, and rising costs of staff, London remains a key wealth management centre.

But its supremacy is now increasingly being called into question. Large wealth management organisations are taking a step back and examining their logistics, economics and target markets. Can they still make a financial success of concentrating experts in London, sustained by a vibrant home market and also target wealthy individuals in surrounding countries from the same hub?

Swiss private banks have been keen to base their offices here and have invested heavily in staff and resources. They have come to London in force, to compliment the domestic stalwarts such as Coutts, Barclays and HSBC. But there is an element of doubt creeping in for foreign players in particular, with many exploring the benefits of basing head offices in Luxembourg rather than London. 

There is a suggestion they can no longer trust the UK authorities for maintaining the most conducive working environment and access to European and global markets. Both the disunited Conservative Party, barely clinging on to power, and the hapless opposition Labour contingent are ignoring the needs of the business and finance communities. They are running scared of a wafer-thin referendum majority for Brexit, concentrated in economically vulnerable Northern towns. Moreover, questions around funding of the Leave campaign and possible links to Russian interests have yet to be resolved.

Looking bleak

While wealthy clients – those who ultimately determine the future of private banks – were until recently sanguine about Brexit and convinced that an acceptable compromise agreement would be found between the UK and the EU, that no longer appears to be the case.

Bermuda’s long-established international private bank Butterfield decided to exit the London market in 2016, faced with fierce competition from other, better resourced foreign and domestic players, but decided to maintain a mortgage financing unit in the heart of the city.

The influx of wealthy families into the UK, particularly Middle Eastern investors, convinced the bank that property investment in London would be an odds-on horse to back. They cater particularly to those families who have a complex international portfolio of holdings and cannot necessarily produce three months-worth of payslips to confirm their income. Family offices, now competing with private banks for the business of wealthy clans, are also increasingly finding London to be an attractive location.

“London brings in a mix of entrepreneurs and wealthy families with an international flavour,” confirms Alpa Bhakta, managing director of Butterfield Mortgages in London.

Transactions in central London have slowed markedly over recent months, as concern over a cliff-edge Brexit mounts. “Clients from Europe looking to purchase have definitely tapered off,” says Ms Bhakta. “They are waiting to see what happens.”

Purchase values are at least 15 per cent down in Knightsbridge and Chelsea, the main “prime central” districts on which wealthy foreign buyers are focused. Butterfield is among those banks that want to see a quick resolution to Brexit. Over the long term, they are convinced London will remain a high profile financial hub and destination, and that there is a “whole world” of wealthy clients, who will continue to find the Thames-side city attractive.

“Our biggest challenge is what happens around Brexit,” says Ms Bhakta, who hopes property prices will stabilise and demand will return, if the government does manage to sign an agreement beneficial to London’s future as a financial centre.

Wait and see

US wealth manager Northern Trust is typical of banks facing the London conundrum. 

Seen traditionally as a purely US-based manager for the wealthiest end of the spectrum, the Chicago house is keen to spread its tentacles through Europe and beyond. It has established a 26-strong family office operation in London’s Canary Wharf and has ambitious plans to grow substantially, servicing not just European clients but those in Asia and the Middle East who want to book and domicile their assets in a reputable jurisdiction, further from home turf.

Like many competitors, the bank is still waiting to assess the consequences of Brexit. A strategic decision has already been made to increase staff and resources in Luxembourg, where Northern acquired UBS’s fund administration unit. How investment will be shared between Luxembourg and London in the future remains to be seen.

But the argument swings both ways. Whereas the smaller Swiss banks like Syz and UBP are looking increasingly to run European operations from Luxembourg rather than London, the giant UBS sees London as its largest opportunity in Europe, outside Switzerland, and will continue to invest here, despite having only a 4 per cent share of the UK home market and the necessity to face up to a regulator which it perceives as Europe’s most demanding.

The Swiss bank confirms that a new approach is needed for UK clients, and that the product pushing of the past will not wash with either the regulator or the market in general. The question is will the European and US banks, with their centralised approach to product and fund selection, be able to prosper in a market with its own regulatory and cultural demands, with some international flavour mixed in?

Northern Trust seems to be taking a wise approach. Bringing in ESG screening, technology – associated with analysis of big data – and goals-based investing approaches which should be common to all markets. It is hesitating however, reluctant to force a US agenda of products and themes on a new market, without seeing how the land lies, especially after Brexit.