In the City, the Bluffing Is Over

During crisis after crisis, London’s financial giants cried wolf about leaving. Now the wolf is at the door.

The offices of banking giants HSBC and Barclays are pictured at Canary Wharf in London, on Dec. 28, 2020.
The offices of banking giants HSBC and Barclays are pictured at Canary Wharf in London, on Dec. 28, 2020. Tolga Akmen/AFP/Getty Images

Back in 2010, with the pain of the global financial crisis still fresh, the Labour government of then-British Prime Minister Gordon Brown proposed raising the country’s top income tax rate to 50 percent as part of its effort to quell public fury over the bankers’ complicity in the global financial crisis. Working London myself at the time, I made a bet with a good friend—a fierce Labour Party supporter—that the move would lead the country’s financial services giants to make good on their threats to leave the United Kingdom for places like Ireland or Luxembourg.

I lost the bet. Leaving the city turned out to be a banker’s bluff, one the United Kingdom’s financial sector rolled out every time regulators threatened new strictures or governments mulled higher taxes. In fact, despite the top income tax rising to 50 percent in 2010 and staying there until 2013, London held its place as Europe’s most important financial hub. Very few London jobs decamped to cities furiously trying to woo bankers to cross the water, including to Amsterdam, Dublin, Paris, and Frankfurt. Nor did any of the hundreds of foreign financial institutions that have traditionally sited their regional operations in London choose to leave.

Now, post-Brexit, early signs suggest the bluffing is over. Last week, data from the Chicago Board Options Exchange, the world’s largest options trader, reported that Amsterdam surpassed London in daily trading in January, pushing London, the continent’s financial leader since the days of Empire, into second place.

By October 2020, about $1.5 trillion in assets held in the United Kingdom were also moved abroad.

More ominous still for the United Kingdom’s financial sector, which represented nearly 7 percent of the country’s GDP in 2019, is it’s starting to see real evidence of job loss. A modest 7,500 jobs left the United Kingdom for European Union cities by October 2020, with Dublin the most popular new location, according to the Ernst & Young Financial Services Brexit Tracker. About $1.5 trillion in assets held in the United Kingdom were also moved abroad, amounting to about 14 percent of the total assets of British-based institutions.

To name just a few examples, just before the Jan. 31, 2020 Brexit deadline, Barclays, a quintessentially British firm, sent nearly $265 billion of its assets to Ireland. JPMorgan Chase pushed $230 billion to Germany. And on Feb. 21, the Financial Times reported that HSBC, Britain’s largest bank by far, was relocating most of its revenue-producing divisions to Hong Kong as part of a larger pivot to Asian markets, where HSBC has traditionally been strong.

What’s more, British headhunting and tax advisory firms that typically work with London banks have reported a downturn in business. Some of this could be a result of the United Kingdom’s worst-in-class performance on COVID-19 and the economic damage it wrought. But financial services firms should be riding relatively high thanks to the resilience of their global share prices and would normally be preparing for the post-coronavirus rebound with recruitment.

Yet Morgan McKinley, a leading recruitment firm for the British financial sector, noted in January that London firms advertised 49 percent fewer openings in 2020 than in 2019. In a survey of financial services professionals done as the Brexit talks were winding down last year, the firm found some clear-eyed realism about London’s future. An Armageddon scenario whereby all the big banks jump ship for the continent appears unlikely. But after polling, the firm concluded that European financial capital and its job benefits “will be spread among the other major financial hubs of Europe.” Frankfurt and Paris, the report said, “were ahead of the rest (with 24% and 27% of the votes respectively), followed by Dublin and London (both receiving 18% of the votes).”

The pandemic has only deepened the gloom. The United Kingdom was one of the hardest hit countries of any major European economy by COVID-19, suffering a GDP decline of 9.9 percent in 2020—as many analysts noted, the worst fall in more than 300 years. What’s more, once a playground for the world’s rich, London has seen some 700,000 foreign-born residents leave the country since the pandemic began, according to the British government.

These numbers have infuriated financial services bosses in the United Kingdom, who said with bitterness that the last lap of the fraught Brexit negotiations paid more attention to the country’s miniscule fishing industry than to London, where the financial sector represents 7 percent of British GDP and more than 10 percent of its tax revenues. (By comparison, official government data shows only 8,000 people are employed in fishing in the country, compared with more than 1 million people in finance.) The finance sector also generated the United Kingdom’s largest trade surplus of any economic sector, according to the Bank of England, with a positive balance of $50 billion in 2019.

Although a deal on fish was finally filleted, no language guaranteeing a tariff-free approach to finance was in the offing. As a result, since Jan. 1, the ability of United Kingdom-based financial firms (including U.S. giants like Goldman Sachs and Citigroup) to continue to serve EU customers has been based on a six-month waiver grant of so-called equivalence rights, which Brussels can withdraw on a whim and which expires anyway in late June. More than a trillion dollars of daily EU-based derivatives trading is currently routed through London’s markets, and that flow could dry up overnight sometime shortly after the summer solstice. The Bank of England recently warned British bankers that continuing talks over equivalence rights were not going well, and the European Commission, finding itself in the unusual position of wielding real power over a recalcitrant former member state, has suggested London’s banks will be treated no better, but no worse, than New York when it comes to EU market access.

“What we envisage for this framework is similar to what we have with the United States,” Mairead McGuinness, the European commissioner for financial stability, told the European Parliament in late January. It will be, she said, “a voluntary structure to compare regulatory initiatives, exchange views on international developments, and discuss equivalence-related issues.” That’s the financial services equivalent of “blood is thicker than water.”

Despite handwringing over Prime Minister Boris Johnson’s government’s neglect of finance during all the Brexit showmanship, British regulators have only belatedly moved to mitigate some of the risk to the U.K. financial sector’s future by emphasizing markets beyond the EU.

The Johnson government, pressed by London lobbyists, has enacted new immigration rules that will make it easier for London firms to bring on financial professionals from around the world, a move viewed as an effort to soften the blow dealt to big U.S. and Asian banks that have their regional hubs in London. Previously, bringing a U.S. national or a Singapore banker to work in London was viewed by the U.K. as displacing a job that might be filled by a British citizen. That will no longer be the case.

Another move being pushed by regulators and London’s largest exchange—the London Stock Exchange—is a reform of “listings” regulations. Johnson’s government is mulling changes that would shorten the minimum marketing period for firms, which announced an initial public offering (IPO) currently set at six days.

Bankers argue that long periods expose firms to undue market volatility—although others note it also gives prospective investors time to sniff out vaporware (products under development that are never released), poor governance, or other problems not unheard of in fast-growing start-ups seeking to sell shares. Whatever the truth of either claim is, the period is longer than that required by rival markets, and the London School of Economics and Political Science argues London is losing business as a result. For instance, the dominant player in U.S. IPOs, the New York-based Nasdaq Stock Market, imposes no such requirement, although investment banks bringing IPOs to market often insist on marketing periods anyway.

Even if these reforms proceed, they’re unlikely to stave off some loss to other EU markets.

This all sounds like bad news, but London does have at least some reasons to be bullish about longer-term prospects. The United Kingdom (and its cousins in Australia, Ireland, the United States, Canada, and beyond) continue to benefit from London’s long run as the most important global financial center—even if that run has ended—because its practices molded markets in Sydney, Dublin, New York, Toronto, and elsewhere. And the city remains the global king of currency trading.

The English language, too, represents a significant benefit. It’s no coincidence that the language of the many rival financial centers London competes with is English, and not just those listed above but in Hong Kong, Mumbai, and Singapore. Even the Shanghai Stock Exchange, China’s largest stock exchange, publishes all of its key metrics also in English.

“I think what London needs to be focused on is not Frankfurt or Paris,” Barclays CEO Jes Staley told the BBC earlier this month. “It needs to be focused on New York and Singapore.”

Whether the city can muster enough magic to recover from its “own goal” of Brexit, though, remains to be seen.

Michael Moran is an author on political risk and macroeconomic trends.

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