While public debate continues on Brexit and uncertainty about which political careers will survive the process remains, the direction of travel for financial services is not as clear-cut as some might argue. While mainstream press coverage is overwhelmingly negative on the implications for the UK and the expectation that business will move to financial centres on the Continent, there is an alternative and more positive narrative being expressed within parts of the financial community in London.
Business will move geographically, but this may not be exclusively in the European Union’s (EU) favour, as most expect. There are two contrary forces at work here, the first a flow from mainland Europe into the UK, and the second a migration of business from the UK to the US.
Despite the public statements made by many of the banks, a continuation of headcount growth by some European banks in London can be observed – pointing to the possibility that the core activity of processing capital may remain here. While there are also jobs being set up in Europe by banks that have UK operations, and this is in some part a continuation of existing plans to downsize and relocate non-core functions, or to place customer-facing roles closer to end users.
It can also be argued that this reflects a fragmented European finance model where support and operational functions are distributed, rather than the rise of a new ‘hub’, and that London is actually likely to increase its role as the European centre of finance.
The FT, for example, recently estimated that despite public statements from Deutsche Bank that up to 4,000 jobs might move to Frankfurt, only 350 were expected to leave by April 2019. UBS has also voted with its feet, moving 5,000 staff to its purpose built hub in Broadgate with Investment Banking President Andrea Orcel saying the bank wished to keep “as much as we can in the UK” at the World Economic Forum in Davos in January.
Capital markets require critical mass to be effective and efficient, and that requires a strong hub. If London’s infrastructure and investment community does not move in its entirety, the EU may struggle to create a European centre of finance. This doesn’t just extend to financial and technology infrastructure. As the Chief Executive of Deutsche Bank John Cryan commented, in order to attract staff Frankfurt would ideally need “more attractive urban residential areas, enough international schools, a dozen additional theatres and a few hundred restaurants”.
Primary markets are key to delivering a critical mass of secondary markets, but they are also reliant upon a critical mass of investors and a framework of rules. Re-locating the City to another location in Europe is akin to moving Silicon Valley to Canada – possible on paper, but impractical in reality. Hence the expectation with some that the City will remain as the most important financial centre in Europe.
The ongoing competition between European financial centres has still not delivered a winner, with Frankfurt and Paris currently positioned at 11th and 26th respectively in the Global Financial Centres Index (GFCI 22). The problem is not just down to inertia and competition between European centres; the legal frameworks in many European countries often lack the support needed to handle complex financial transactions and regulatory structures are less accommodating. The US may be well-placed to benefit from expansion of clearing and the EU could struggle to dominate this business. The old battle of London versus New York might also see Chicago edging its way in, with US gains being split between the two.