The City of London has not been as vocal as other industry sectors during the Brexit negotiations, but it is perceived to be dissatisfied. The UK’s future relationship with the EU remains unclear – and if there’s one thing most businesses do not like it’s uncertainty. This is why the City broadly approves of Theresa May’s withdrawal agreement. At the very least, it stops Britain crashing out of the EU without a deal on March 29.
But, with UK politicians not signing off on this agreement, uncertainty persists. And, as Brexit’s 11th hour creeps closer, we are able to see just how different financial firms are dealing with the UK’s impending departure from the EU.
Arguments as to the effects of Brexit on the City range from the catastrophic to the negligible. Reams of data and statistics have been produced to illustrate these extreme positions and multiple standpoints in between. The effect has – predictably – been confusion. Is the City really threatened by Brexit or not?
Perhaps unsurprisingly, attitudes vary from firm to firm and the answer can be found by untangling the different aspects of City business. Firms dealing with managing the investments of wealthy international clients and funds are less affected by a regulatory rupture between the UK and the EU. Yes, there may be some costs involved in moving funds around to meet regulatory requirements as they evolve, but there are also opportunities.
Regulatory and tax arbitrage – where firms capitalise on legal loopholes and inconsistent requirements in different countries – is how much of the City makes its money. So a new subdivision of systems and requirements within Europe would open up opportunities for savings and new products. The significant amounts of money involved in this aspect of the City’s business ensure that a great deal of the current financial structure will remain in place, no matter what shape Brexit eventually takes.
Other aspects of the City’s business are more vulnerable. Losing the “passporting” rights that allow banks to ply their services across the EU means that those parts of the City engaged in insurance, commercial and retail banking will no longer be able to service their European clients. As much was admitted in the government’s no-deal preparation notices. And even if a Brexit deal is signed off before March 29, the loss will occur after the end of the transition period.
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Subsequently, for the part of the City’s banking and insurance sectors that deal with what we call the real economy (standard retail clients and businesses) their business model is up in the air. The only safe solution is to relocate to an EU member state or wind down contracts they will not be able to service in the future.
This explains the uneven movement of City firms in response to Brexit. Some move funds and some of their people by establishing or augmenting a base in Europe. For example, Barclay’s bank recently obtained court approval to move a massive €190 billion fund to Ireland.
But this movement isn’t just in one direction – those firms that used to serve British clients from an EU location are now relocating to London. Citibank, for example, is setting up a new British bank that will be headquartered in London to ensure it can service its retail clients in the UK after Brexit. Previously, this business was covered by its Citibank Europe headquarters in Dublin. Of course, the money involved reflects the relative strength and volume of the client base. This is why the movement away from the City makes headlines, while the opposite is primarily of interest to clients affected.
For other firms, changes brought about by Brexit are so fundamental that they no longer need to maintain a UK presence. Those will move their regulated operations or relocate the entirety of their funds, with Frankfurt, Paris and Dublin being the main beneficiaries in the field of financial services.
A less-reported consequence of all this movement is that City firms might also be examining their legal options in terms of suing the British government for the losses incurred by relocations, or loss of market access. So far only a few have the jurisdiction to sue – investors from countries that have signed some form of treaty with the UK that includes investor-state dispute settlement clauses. These will be primarily firms from outside Europe that had settled in the City in order to serve European clients, which may argue that the UK government’s handling of Brexit violated their legitimate expectations of moving to (and investing) in UK offices. But, depending on the extent of losses, and the final form of Brexit, lawyers are likely to be busy investigating.
Will there still be a City of London in April? The answer is yes. But it will be different, no matter which shape Brexit eventually takes. In markets, actions speak louder than words, and booming sales of Brexit survival packs are certainly not a good sign.