With Brexit now little more than a year hence, cities and jurisdictions in Europe and beyond are looking to get a slice of the UK’s £125 billion financial services pie – the lion’s share of which is earned by London
On 24 October, Mike Bloomberg unveiled the new European headquarters of his global financial information services company… in London. Taking to the stage, one framed by the backdrop of St Paul’s through a vast window, the billionaire former mayor of New York justified his estimated £1 billion, 1.1 million square foot investment in the British capital, saying that whatever happens with Brexit, London would ‘grow as a global capital for years to come’. That Bloomberg’s new European home was built using 9,600 tonnes of Derbyshire sandstone and is situated a stone’s throw from the Mansion House and the Bank of England surely said it all. Or so you’d think.
In comments reported that day by The Guardian, the media mogul described Brexit as the ‘single stupidest thing any country has ever done’ with the exception of voting in Donald Trump, adding: ‘We are opening a brand new European headquarters in London – two big, expensive buildings. Would I have done it if I knew they were going to drop out? I’ve had some thoughts that maybe I wouldn’t have, but we are there, we are going to be very happy.’ Of Brexit, he added: ‘Getting out of it [the EU] is going to be very difficult and is going to be very painful. It will hurt industries. People are already taking space in other cities over there [Europe], us included.’
Just weeks earlier, his own firm had reported that Frankfurt was ‘the big winner in the battle for the Brexit bankers’, with more than 3,000 jobs from a string of banks heading to Hesse. That was out of a total of some 12,500 exiting the UK. ‘The status of London has diminished in the eyes of our partners and competitors,’ Catherine McGuinness, the Corporation of London’s policy chief, warned in December.
Meanwhile, Bill Winters, the boss of British banking stalwart Standard Chartered, which is turning its Frankfurt location into its EU subsidiary, states bluntly that Brexit will harm the City: ‘London will take hits in the context of Brexit,’ he said in December. ‘I think big parts of the euro-denominated corporate banking business will be forced into Europe.’ Against this backdrop, the country has also been assailed by grim economic forecasts: ‘We are going to have secular decline’ because of Brexit, notes the economist Yanis Varoufakis in an interview with Spear’s.
Seemingly at the vanguard of the international banking exodus is Goldman Sachs, whose chief executive Lloyd Blankfein has been the most publicly outspoken of the elite echelon of global bankers. ‘Just left Frankfurt,’ Blankfein tweeted in October. ‘Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there.’ Which on one level wasn’t surprising, since he had signed a lease on a skyscraper there with space for 1,000 staff, allowing him to add 800 to the existing headcount there. But the tweet nonetheless made the BBC’s News at Ten.
Blankfein’s next Brexit tweet, on Paris, was more effusive: ‘Struck by positive energy here in Paris,’ he wrote in November. ‘Strong govt and biz leaders are committed to economic reform and are well thru the first steps. And the food’s good too!’ In comments to Le Figaro, he also stated that the bank will ‘not have a single centre, but two, in Frankfurt and Paris, because they are the two largest European economies’. So Goldman is hedging its bets. ‘We all need contingency plans,’ a Goldman partner tells Spear’s.
And Goldman Sachs isn’t alone. Fellow American banking giant Citigroup has announced it is moving 250 jobs to Frankfurt, as a result of Brexit. The company is also moving around 20 jobs from its private banking division in London to Luxembourg to handle EU customers’ needs. ‘We wouldn’t naturally go to Luxembourg if we hadn’t got the situation with Brexit,’ says Citi Private Bank’s CEO Peter Charrington. ‘The problem is that we can’t do nothing and hope for the best; we have to hope for the best but plan for the worst.’
Which, when counted alongside Barclays’ movements to Dublin, HSBC’s to Paris, as well as those either announced or rumoured of UBS, JP Morgan, Société Générale, Deutsche Bank and more, all points to a slow sapping of talent, revenue and jobs from London; a thousand or so here, a couple of hundred there, and a few dozen more over there. Drip, drip, drip, until the day arrives when the new normal is a vastly reduced British capital.
For that, Stephanie Flanders, head of the Bloomberg
economics unit, offers a grim forecast from New York. ‘Over time, London will lose its vibrancy as key lines of business are moved or permitted to wither away,’ she predicts. The question is, whither will it wither? A swathe of cities and jurisdictions – notably Amsterdam, Dublin, Frankfurt, Luxembourg and Paris within the EU, and Switzerland, New York and Hong Kong and Singapore further afield – stand ready to eat London’s lunch. In Flanders’ view, Frankfurt and Dublin ‘look set to benefit more than most’.
Frankfurt also has the edge over Paris in the race to slipstream London, according to Jim (now Lord) O’Neill, the former Goldman Sachs chief economist who coined the term ‘Brics’ back in 2001. The peer is bullish about London’s future, though, citing the time zone, English language, labour laws, deep financial expertise and desirability in terms of lifestyle as giving it the edge, regardless of Brexit.
‘The idea that Lloyd is going to take 6,000 Goldman people and put them in Frankfurt or anywhere else… is just not going to happen soon,’ O’Neill tells us. ‘The big, truly international guys, like my ex-shop, they won’t want to go rushing to move a lot of people at first. It was always an issue during my 19 years at GS that the labour laws were relatively rigid, that one was always careful how many people you employed in those places because you could never get rid of them.’
So, unless they change the labour laws, he doesn’t see either Frankfurt or Paris scooping up the investment banking work. What about London’s position in wealth management – could that be lost by Brexit?
‘I don’t think so. As an event, it’s not going to help. But it’s not going to massively harm it. There could be some tricky years in terms of adjustment, but I go back to the time zone and particularly for London, it’s an enormous advantage in this globalised world. I’ve often called London the Brics capital of the world – I used to joke that the biggest risk to us was if New York changed its time zone by five hours. At the moment New York is never open when a large number of these huge, rising commercial and business capitals of the world [are]. That’s a massive advantage for Britain.’ And one that might play a part in the Saudi Aramco decision over whether to list in London or New York – a race, it’s worth pointing out, that no other bourse in Europe is anywhere near to being in.
Of all the Europeans hoping to score out of London’s losses, Dublin looms large. It’s got lots of what O’Neill talks up about London – especially the time zone and language. It’s also got the EU. Financial observer Ciaran Hancock of the Irish Times thinks there could be some gain for Dublin, but he doesn’t expect it to eat London’s lunch any time soon. And he’s not convinced that Frankfurt or Paris can usurp London either. ‘London’s the big beast in the jungle,’ says Hancock when Spear’s visits his patch. ‘Over time [jobs lost to the EU] will be replaced: they’ll find a way around it. These guys are super-smart; they’re involved in products and services which most ordinary people don’t understand. They’ll come up with a construct; they’re bound to. It might take a bit of time but they’ll get there.’
Eight hours ahead of Dublin, in Singapore, the outlook is less sanguine for London. Wealth management consultant Andrew Hendry of Westoun Advisors estimates that EU jurisdictions will take 20 per cent of London’s pie: ‘Dublin will be a huge beneficiary, particularly for Anglo-Saxon-minded firms,’ Hendry tells Spear’s. The big winners will be Frankfurt and Amsterdam for investment banking, while Luxembourg will gain in asset management. For Chinese asset managers, ‘whose first port of call has been New York and London, [it] will now be New York and Frankfurt,’ he states.
Singapore’s largest bank, DBS, which opened a London office in July 2016, doesn’t quite see it that way. ‘Our base scenario is that London is and will continue to be a major global gateway for HNWs and UHNWs around the world,’ Rob Ioannou, head of international at DBS, says. ‘Post-Brexit [decision], we have continued to see significant investor interest in coming into London, especially from our UHNW Asian clients. So just because the UK is leaving the EU, it doesn’t mean clients are leaving the UK at the UHNW level.’ The weak valuation of sterling has no doubt aided all this, but despite the pro-London stance he notes: ‘Today we have a European passport, but logic would dictate that in a couple of years that will no longer be the case. So we will explore regulatory and licensing options that will enable us to have an entity in an EU country.’
This brings us to what many regard as the crux of the issue: the as yet unknown future arrangements for financial services. Gina Miller welcomes the conclusion of the first stage of Brexit talks in December: ‘If the text in the phase one agreement of “full alignment” is legally binding, there may well be little impact on the sector, other than a cultural one in which EU citizens feel less welcomed.’ But the anti-Brexit campaigner and founding partner of SCM Direct adds: ‘If the result is a Canada-style free trade agreement, financial services could see a significant negative impact over time as passporting is replaced by equivalence.’
Time will tell. According to Rachel Kent, a leading legal expert on global financial services at Hogan Lovells who advises banks, bourses and others, the signs are positive that a transitional arrangement will be achieved on the basis of regulatory alignment, leading to an ultimate agreement. ‘I think it will be unique,’ explains Kent, who foresees ‘a bespoke arrangement rather than CETA [the Canadian deal] or anything else’. ‘The biggest issue for me is the extent to which the EU’s financial institutions and corporations need open access to the UK,’ she adds. In other words, if they need access to the capital London has to offer, that will make a deal much easier. ‘The economics will absolutely play into it, and will enable people to form a starting point,’ Kent adds, noting that there’ll also be ‘what you could describe as a political overlay’ to any final arrangement.
Give and take
Which is to say a price: if London wants to maintain the status quo or retain, say, 90 per cent of what it does in Europe, then we’ll have to pay for it, either with financial contributions, as Norway does, or, for instance, by giving ground on freedom of movement of workers, which for the appropriate recompense should not be insurmountable.
Without a deal, the bleaker predictions will gain traction. For now, Stephanie Flanders reckons the financial landscape in London could look ‘pretty different’ in five or six years. ‘Though London may be replaced over time, it’s not going to be replicated,’ she cautions. ‘There will be no single European city that comes close to bringing it all together in the way that London does. That means there will be business that doesn’t happen at all as a result of Brexit, or happens outside Europe altogether. Net result: Europe as a whole will lose, and the big winner is likely to be New York.’ This is a view shared by Catherine McGuinness. ‘New York is our closest comparator and could well be the main beneficiary of a Brexit,’ she wrote in November. ‘No other city in the EU is able to compete on the same level.’
According to TheCityUK, a City advocacy group, Britain occupies a top five position across 12 key financial services categories (Germany, the next best in Europe, makes it into seven, and all lower). It’s also worth noting that London raised 30 per cent of all the funds raised in Europe in 2017. ‘The UK needs the European Union and the European Union needs the UK,’ says Citi’s Peter Charrington, who agrees the big winners of London’s fall would be in Asia and the United States.
That it’s a hard thing for Europe to hear doesn’t alter the fact – something that Mike Bloomberg doubtlessly appreciates better than most. If his £1 billion bet on London were to go south, he would stand to make good on it by gains for New York. Not such a gamble after all.