At first glance, Brexit did not cause any serious damage to the City of London. After a negotiation process in which his concerns were either secondary or completely ignored, the split did not result in a sudden drain of institutions and jobs.
Early predictions that foreclosing London banks from European markets would cost hundreds of thousands of jobs have proven exaggerated. Instead, the New Financial think tank earlier this year estimated the total at around 7,500, likely a slight underestimation but a number confirmed by other sources. This is despite the fact that more than 440 institutions are relocating some of their business or setting up centers within the euro zone and moving assets equivalent to 10 percent of the UK banking system.
This makes sense. Shortly after the 2016 referendum, and certainly after the industry’s preferred relationship with Europe didn’t even make it to the unfortunate Checkers plan, banks, insurance companies and asset managers restructured their businesses to be prepared for anything. This shouldn’t be a final state, just make sure they can work no matter how Brexit has developed.
Since Brexit closed, Covid-19 has postponed the adjustment of the industry towards a potentially more permanent equilibrium. The discussion about a reluctant banker’s move to Frankfurt will certainly become more difficult when a global pandemic has closed the borders. Regulators and politicians, even the predatory cartoonists, had other priorities than poaching businesses and people from Europe’s leading financial center.
That is changing now. Brussels is seeking reforms to stop the use of cross-border agreements that allow banks outside the EU to do business in bloom, also because the use of this type of national permits has increased since Brexit.
Regulators are also increasingly rethinking the tailor-made arrangements and grace periods agreed with London-based banks to put pressure to move more people. This is not a consistent move: a bank that was contacted early had to lose traders to competitors who had not yet been told to switch roles. In many cases, these are relocations that have already been agreed with the supervisory authorities as part of the Brexit plans and are only now being implemented. But the direction of travel is clear: straight down the M20 and on.
Companies themselves will begin to look at what makes sense in the new world, said a senior banker. The restrictions on what UK-based advisors may or may not do when visiting clients in the EU, or the need to have escorts when making phone calls, have not really been enforced. Meanwhile, the huge trading volumes that fueled banks’ results have masked the double costs associated with restructuring to cope with Brexit.
Current deliberations could result in the bank moving the same number of people again, added the financier. These are not huge numbers, but the question is when economies of scale and network effects work against London rather than for them.
All of this before Brussels seriously starts pursuing its goals of “strategic autonomy” in financial services. The Commission intends to increase the ability of European banks to use the London clearinghouses, but remains committed to moving euro-denominated clearing within the euro area. Other changes related to trading in bonds or derivatives or the delegation in asset management could be used to induce more businesses to migrate.
Hence the government’s preoccupation with “competitiveness,” an idea that could unfortunately be incorporated into the UK regulatory framework but largely boils down to importing some of the frothy elements of US capital markets and moving to other parts of the world than the essential ones Section on our front door.
Brexit is bleeding slowly for the city. And the drop, drop, drop goes on.