It’s hard to overstate the scale of the City of London. Generating as much money as Germany’s behemoth automobile industry – some $150bn a year – it is the world’s largest financial centre. It hosts 37% of the globe’s currency dealings and almost a fifth of all cross-border lending. Domestically, City-based firms put to work over 700,000 employees, and account for 11% of total UK government tax receipts. But with Brexit, this metropolis of money faces an uncertain future. Some fear the cataclysmic effects of Britain leaving without a deal, while others relish the prospect of market expansion free of European shackles.
The City’s pre-eminence can be attributed to a handful of key factors. Its openness to the movement people and capital allows the best brains and the most money to flow freely in and out of London. Its timezone facilitates easy trade with Asia, the US and the Middle East. Its proximity to subsea data cables ensures speedy, reliable communications. The UK’s (usually) stable politics and liberal laws and regulation help finance flourish. And the superior global reputation of British universities’ teaching in business and economics helps channel the greatest global talent to its capital.
None of these should be jeopardised by Brexit, in theory, save for the final, and perhaps most important secret to the City’s success – its seamless ties to Europe. London’s financial relations with the continent are intimate. A quarter of its income is derived from Europe, and Europe looks to London for a quarter of its own financial needs. When the European Central Bank (ECB) buys bonds as part of its monetary policy, more often than not, the sellers are asset managers and banks domiciled in the UK. In 2017, Britain exported some $32bn in financial services to Europe.
This cross-Channel flow of money is possible because of ‘passports’ – licenses that allow City firms to trade freely across the continent. Such permits are contingent on EU membership however, and will end with Brexit. And while provisions have been put in place to avoid an exit day financial meltdown, these measures are very much temporary, with some of the most crucial contracts – those governing derivatives, for instance – expiring in a year. The growing risk of a no-deal Brexit – an eventuality that would offer no provisions for the City’s future European relations – is causing particular consternation among financiers.
They had hoped that a special deal could be struck with Europe, owing to their mutual interest in upholding the banking sector. London proposed a bespoke arrangement whereby the City would set its own rules while retaining unhindered access to the European market, so long as standards and regulations didn’t diverge too wildly. But this ‘mutual recognition’ suggestion floundered – the EU had little appetite to offer a departing nation favourable terms.
“It is regrettable and frustrating that this approach [was] dropped,” said Miles Celic, CEO of TheCityUK, a financial advocacy group. “The industry has never come across an unanswerable technical or commercial barrier… the EU’s objections have always been political,” he added.
Europe would disagree with this. Mutual recognition might’ve risked the “regulatory autonomy of the European Union,” said Danuta Hübner, who sits on the bloc’s economic affairs committee. Her proposal – and that of the union at large – is for a system based on ‘equivalence’. This framework grants non-EU states market access through temporary recognition that their rules are in line with Brussel’s. As promising as it sounds, equivalence does not offer the City the security it needs, financial lobby groups argue.
Their case is borne out by the recent fortunes of Switzerland, some might say. The central European nation – itself a Mecca of money – trades with the EU (of which it is not a part) on equivalence terms – but has, in recent weeks, found the system to be less than forgiving. After failing to win Swiss agreement for a new treaty, the European Commission exercised its right to unilaterally withdraw the equivalence framework, severing access to EU markets. With Switzerland seemingly outmanoeuvred, many believe that Brussels’ show of power was for a London audience.
But the EU’s attempt at focusing British minds might well fall flat. In the days that have followed Europe’s punitive measures, Switzerland’s stock exchange has ticked along without a hitch – with shares even rising as much as 1.3%. And while the longer term effects remain to be seen, recent research has furthered the case of a strong City outwith Europe. Almost two-thirds of the financial industry believe that Brexit will not negatively impact the UK’s banking sector, a survey conducted by the Centre for Banking Research found.
“London will continue to be a key player in the global financial services industry and capital markets following Brexit,” said the study’s co-author Professor Barbara Casu Lukac.
Despite this apparent optimism, big banks are preparing for the worst, shifting staff and resources to the continent at pace. Some $1.3 trillion of assets has been moved from the UK to Europe already, according to EY, a global accounting firm. Paris, Amsterdam and Frankfurt seem to be the main recipients of the flight – with the latter gobbling up over $900bn of assets so far. In overdrive to shift personnel before Brexit day, firms are offering generous staff relocation packages. Upwards of 4,000 have already agreed to move, reports suggest.
And so it’s clear that – even before the day of reckoning – Brexit is changing the fabric of the UK’s financial sector. Optimists hope that the City’s innate qualities will deliver it from doom, and that free of European regulations it might even flourish. But the closeness of London and Europe’s finances is beyond dispute, and the growing fear of Brexit’s upheaval is palpable. The short term impact might be surprising for both its devastation, or lack thereof – but it’s in the decades to come that the real toll will emerge.