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Abu Dhabi, UAETuesday 11 December 2018

Europe's financial centres compete to woo financial firms away from London

Frankfurt winning the race to attract banks following last year's Brexit vote

Frankfurt's financial district. The city is currently in pole position to attract financial institutions from London in the wake of last year's Brexit vote. Krisztian Bocsi / Bloomberg
Frankfurt's financial district. The city is currently in pole position to attract financial institutions from London in the wake of last year's Brexit vote. Krisztian Bocsi / Bloomberg

Seventeen months after the UK’s Brexit referendum took place, negotiations between the United Kingdom and the EU are struggling due to the extreme complexity of the matter at hand. The longer it takes for the representatives to agree on key issues including trade, customs and the final Brexit “divorce” bill, the more uncertainty it creates for the UK’s economy.

Brexit will clearly have a major impact on many sectors in the UK, but the financial industry is likely to see the most shake-ups. The financial services sector contributes to more than 7 per cent of GDP and employs over 1.1 million people.

Over the centuries London has established many key positions in the financial sector. The City is the largest global hub for foreign exchange markets, derivative markets and money markets, and is a co-leader in several other segments.

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The prevalence of the English language and the geographical position between Asian and US time zones also supported the development of the financial centre. London is able to maintain its favoured position due to the availability of skilled personnel, a good regulatory environment and access to other financial markets and clients.

Brexit is undermining these aspects; a lot of uncertainties are emerging. Skilled foreign workers might be at risk of leaving the country if the UK and EU politicians decide to get tough. The main regulatory risk is that asset management companies and financial service providers will lose their “European passport” allowing cross-border activity within the EU. This regulatory change will force companies to relocate their business, at least partially, in the euro zone.

Another uncertainty is the presence of European agencies in London, which will be under pressure to relocate elsewhere in the EU. The European Banking Association, one of the three European financial supervisory authorities, will be courted by a number of governments.

These moves are not particularly damaging in terms of job losses but more in terms of prestige for the city. More damaging is the loss of the euro clearing activity. Clearing is the process by which a third-party provider acts as the middleman for both sellers and buyers of financial contracts. This mechanism aims to reduce the dangers of a domino-effect spreading across the entire system in case one counterpart cannot fulfil its commitment.

Following the 2008 financial crisis, clearing has become a much larger business, following the G20 insistence on over-the-counter transactions being settled in clearing houses. LCH Clearnet, located in London, is the largest clearing house for euros globally, and might be forced to relocate its activity in the EU. The risk here is that the whole clearing ecosystem will move too.

For as long as uncertainty surrounds Brexit negotiations, it will be difficult to quantify the impact of financial institutions and jobs leaving the City. PwC estimates that Brexit could cost the UK between 70,000 to 100,000 financial services jobs by 2020. The prospect of such a migration has whetted the appetite of other European financial centres, which are fiercely competing to lure bankers away from London.

So far, Frankfurt is attracting the big players. Morgan Stanley, Citigroup, Standard Chartered and Nomura are among those that have chosen to relocate there to access the EU single market. Germany is the largest economy in the euro zone and the headquarters of the European Central Bank is located in Frankfurt. German financial institutions are recognised for their professionalism; however they are rarely market leaders. The main challenge might be to convince City workers to live in a city where the way of life might be perceived as less glamorous.

Paris also benefits from the location of many bank headquarters; three of the top five banks of the euro zone are located in the French capital. French asset management is also well developed and recognised worldwide. Employers will have access to a large pool of skilled labour and quality infrastructures. Beyond a tax environment which is less favourable, the key challenge will be for Paris to deal with mistrust. France has historically been considered as a country hostile to finance; François Hollande, the former President, stated that finance was his true enemy. The new president, Emmanuel Macron, an ex-banker, will have to convince a lot of sceptics that France is committed to supporting the financial industry in the long term.

Dublin and Luxembourg are also active in the financial services sector and would love to gain from this reshuffle. Both of them have historically focused on fund administration and they have built strong positions over the past decades. Dublin is probably better positioned due to its cultural proximity with London and the English language.

All these countries have started to take measures to make their environment more attractive to welcome these financial services companies and their staff. Brexit is a unique opportunity for these cities to increase their positions to become the financial centre in Europe.

Sebastien Henin is the managing director and head of wealth management at Alienor Capital