At first glance, Brexit did not cause serious damage to the City of London. After a negotiation process where his concerns were either secondary or entirely ignored, the split did not cause a sudden exodus of institutions and jobs.
Early predictions that cutting London-based banks off European markets would cost hundreds of thousands of jobs have proven to be exaggerated. Instead, think tank New Financial earlier this year put the total at around 7,500, possibly a slight underestimate, but a number echoed by other sources. And this, despite the transfer of part of their activities or the creation of hubs within the euro zone by more than 440 institutions and the transfer of assets equivalent to 10% of the British banking system.
It makes sense. Shortly after the 2016 referendum, and certainly after the industry’s privileged relationship with Europe did not even reach the unfortunate stage of the Checkers plan, banks, insurers and asset managers restructured their operations to be ready for anything. It wasn’t meant to be an end state, just making sure they could work, however Brexit unfolds.
Since Brexit was concluded, Covid-19 has delayed the industry’s adjustment to what could prove to be a more sustainable balance. The conversation about moving a reluctant banker to Frankfurt certainly becomes more difficult when a global pandemic has closed borders. Regulators and politicians, even cartoonish raptors, have had other priorities than keeping businesses and citizens away from Europe’s leading financial center.
This is about to change. Brussels is considering reforms to crack down on the use of cross-border agreements that allow non-European banks to do business in the bloc, in part because the use of such type of national permissions has increased since Brexit.
Regulators are also increasingly reviewing tailor-made deals and grace periods agreed with London-based banks to push to move more people. This is not a uniform push: One bank contacted early faced losing traders to rivals who had not yet been told those roles had to change. In many cases, these are relocations that had already been agreed with regulators as part of the Brexit plans and are only being implemented now. But the direction of travel is clear: go straight down the M20 and continue.
Businesses themselves will begin to consider what makes sense in the new world, a senior banker said. The restrictions on what UK-based advisers can and cannot do when visiting clients in the EU, or the need for chaperones when making phone calls, have not really been applied to this day. Meanwhile, the huge transaction volumes that have inflated banks’ results have masked the duplication of costs involved in the restructuring carried out to deal with Brexit.
The current deliberations could cause the bank to move the same number of people again, added the financier. These aren’t huge numbers, but the question is when economies of scale and network effects start to work against London rather than for it.
All this before Brussels began to seriously pursue its objectives of “strategic autonomy” in financial services. The Commission is ready to expand the ability of European banks to use London clearing houses, but remains committed to moving more euro clearing within the euro area. Other changes regarding bond or derivative trading, or delegation in asset management, could be used to encourage more companies to migrate.
Hence the government’s concern for “competitiveness,” an idea that could sadly be dismissed in the UK regulatory framework, but which largely boils down to importing some of the more sparkling elements of US capital markets and pivoting towards parts of the globe other than the substantial section on our doorstep.
Brexit is slow bleeding for the City. And the drip, drip continues.