Life in London’s financial district will appear little changed when Britain leaves the European Union on March 29, defying predictions of an exodus of high-flyers to rival centers like Paris, Frankfurt and Dublin.
But as chaos reigns in Westminster, the mood in the capital’s historic “Square Mile” and Canary Wharf’s gleaming towers is one of resignation and regret.
Without meaningful access to the EU’s single market, the financial services sector is braced for a long goodbye to its status as the world’s international trade and banking hub, more than a dozen senior industry players told Reuters.
“It could be a slow puncture,” said City of London leader Catherine McGuinness, flagging a steady drain of talent and activity from an industry that has wielded little influence in Brexit negotiations even though it generates about 10 percent of Britain’s economic output.
“We won’t know what we are going to look like for at least 10 years.”
Sources cited years of political strife — from Scotland’s 2014 independence referendum to the bitterly contested Brexit vote and its aftermath — that have hurt Britain’s image as a safe haven for banks, market-makers and investors.
Few are willing to bet that the financial industry, whose 2.3-million-strong workforce stretches across the country, will be bigger or more profitable in a decade’s time.
Parliament has yet to settle on whether Brexit will be hard, soft or even happen at all after Prime Minister Theresa May pulled a vote scheduled for Tuesday on her divorce deal with the EU that she acknowledged she would lose.
But the feeling in the City is that much of the damage has already been done and is largely irreversible.
The finance industry is also grappling with a new political reality in which it has no clear allies in government.
Bankers initially expected ministers to champion their cause above other industries. Instead, the finance sector has been sacrificed to protect manufacturing and secure an end to freedom of movement from the EU.
“It feels like we have been thrown under the bus,” a senior executive at one of Britain’s top banks said.
Euro Zone Gravity
Britain and its financial regulators argue that the vast financial services “ecosystem” that has evolved in London since the 1980s “Big Bang” will help the City maintain its role as ‘banker to Europe’.
The French, German and Irish governments are pushing hard to replicate this, however, incentivising big financial firms to expand in their countries and wooing bankers who fear for their job security in post-Brexit Britain.
Many banks, insurers and asset managers who want to retain access to customers in the EU after March 29 have already redirected hundreds of millions of pounds of investment towards new or expanded hubs in the bloc.
Nearly 40 banks from London have applied to the European Central Bank for licenses. According to Frankfurt Main Finance, which promotes the German financial capital, these are set to transfer 750-800 billion euros in assets early in 2019.
The shift in activities has alarmed UK regulators so much that the Financial Conduct Authority (FCA) has written to banks saying they must be able to justify any shift of non-EU business from London to EU hubs.
The Bank of England’s top regulator Sam Woods has said he expects around 4,000, or about 1 percent, of City jobs to have left by Brexit Day, a fraction of the 30,000-232,000 some consultants had initially forecast.
A Reuters survey of 123 firms in September showed as few as 630 UK-based finance jobs had been shifted or created overseas.
But the ECB has told financial firms they must staff their new EU offices with decision-makers, managers, risk-takers and support teams appropriate to the business they operate from them, meaning a slow brain-drain from Britain looks inevitable.
“Once the European regulators have their hooks in you, they can then start to ratchet things up, limiting how much outsourcing to London and elsewhere outside the EU that you can have,” said David Lawton, a former senior FCA official and now with consultants Alvarez & Marsal.
Some core services are already moving.
The London Stock Exchange’s MTS Cash and CME’s BrokerTec platforms will have moved all trading in euro-denominated government bonds and repurchase agreements to the bloc by March, whatever form Brexit takes.
Customers of share-trading platform Aquis will use a new Paris hub from March, with only non-EU stocks left in London.
French bank Societe Generale said on Monday that some customers now want to clear their trades in the euro zone instead of London.
“The train has left the station and it ain’t turning back. The U.S. and Japanese banks will never put their eggs in one basket again,” a senior UK banking industry official said.
Other parts of the transaction chain may follow.
That includes clearing of 210 billion euros a day of repo trades, according to Godfried de Vidts, chair of the ICMA European Repo and Collateral Council.
“It will not be possible to do a big bang and move everything from the City to the euro zone in one go because it’s far too complex, but it will happen progressively over the next few years,” de Vidts said.
Insurers like AIG and RSA have already obtained court approval to shift chunks of policies with EU customers from London to Luxembourg.
Global banks like JPMorgan, Goldman Sachs and Bank of America Merrill Lynch, which made their European homes in London, are scattering staff across EU cities as a “multipolar” European financial system slowly emerges.
“The pity here is that we are crumbling and unraveling something so efficient for everyone, that took more than 30 years to build,” said a senior banking executive who declined to be named.
“Day 1 (after Brexit) may look benign, and Day 2 may look slightly different … But what is very clear is that there is no single winner, it is a question of who loses most.”
Tug of Rules
Monday’s delayed vote has shortened the odds on a no deal Brexit but Britain may secure a “standstill” transition deal, retaining EU rules and full single market access until at least the end of 2020. If so, the extent of damage to the City will become more apparent when transition ends.
“When you consider all that London has survived through, up to this point, it is tough to say that the vast majority of it won’t cope just as well the other side of Brexit,” said Omar Ali, head of financial services at consultancy EY.
“But saying we’re not facing imminent disaster is not the same as saying our success is guaranteed in 10 years’ time.”
The EU has said Britain’s financial market access after transition would be based on its equivalence system, a patchy and politically uneasy gateway that requires home rules of foreign financial firms to be closely aligned with the EU’s.
The EU is tightening up equivalence conditions ahead of Brexit.
“There are steps being taken to regulate third-country access in areas where it hasn’t been regulated before,” said Bank of England Deputy Governor Jon Cunliffe.
The EU accounts for 40 billion pounds or a fifth of UK financial sector revenues, with half depending on full “passporting” or unfettered access to the single market.
With that in mind, some UK lawmakers and bankers say Britain should focus on fashioning rules and taxes that keep London competitive with global financial centers like New York, Singapore and Shanghai.
“There will be in effect a permanent debate on whether to align or diverge from the EU framework,” said Nicky Morgan, chair of parliament’s Treasury Select Committee.
EU policymakers shrug at Britain’s arguments that European companies will pay more for financial services without the cost efficiencies currently offered by London’s scale and scope.
Their ultimate aim is a capital markets union (CMU) that will end the EU’s reliance on London as a source of funding.
Progress so far is slow as London continues to clear more than 90 percent of euro-denominated derivatives. Efforts to dislodge chunks of that $280-350 billion a day business have largely been resisted so far.
London’s global dominance in foreign exchange trading and cross-border lending has also yet to be challenged.
The amount of international lending channeled through UK-based banks grew by about 11 percent in the first six months of 2018, compared to the same period last year.
The next two largest markets are the United States, where lending declined by 1.68 percent and Japan, which saw a 4.79 percent rise. But there is no room for complacency.
“The long-term requires that the capital market becomes more self-sustaining in Europe,” said Jonathan Hill, the former EU financial services chief and an architect of the CMU, who is now an advisor to UBS.
“Whether they can pull it off is a different question. But it won’t stop them trying.”
($1 = 0.7868 pounds)