A year since Britons voted to leave the EU, one of the few certainties is that international financial companies will move jobs out of London. The question remains how many, and it’s a question that matters for the entire country because the financial industry is a vital part of the UK economy.
The City of London, as the financial district is known, wasn’t a top concern for Theresa May after she became prime minister last summer in the wake of the Brexit referendum. May prioritized restricting immigration (what she perceived leave voters wanted) over keeping access to the EU’s single market (what many financial executives wanted). The UK can’t have both—staying in the EU’s market, the world’s biggest, requires freedom of movement for people.
May’s authority was badly weakened this month when a snap election, meant to shore up her Conservative Party majority, blew up and left her with a minority government. The shakeup could lead to an outcome that’s better for financial executives. But in the meantime banks’ plans to keep unfettered access to their EU customers have already been triggered.
As Goldman Sachs CEO Lloyd Blankfein pointed out in a recent BBC interview, the UK has been an ideal place for Wall Street banks to set up European operations because of the common language and concentration of business. Without knowing how things will turn out, Goldman, which employs about 7,000 in the UK, has “to be in the contingency planning business,” he said.
Finance and related services employ some 2.2 million in the UK and about 751,000 in London, according to lobby group TheCityUK. JPMorgan Chase has already said that 4,000 of its UK jobs are at risk; last month an executive told Bloomberg News that the bank would move hundreds of jobs from London to newly expanded offices in Dublin, Frankfurt, and Luxembourg. Bruegel, a think tank, has estimated that 30,000 jobs could move from London to the EU, and that some 35% of wholesale banking (financial services for governments and big companies) may also relocate to the bloc. The European Banking Authority, which employs about 160 people and is based in London, will plainly have to move.
London was a financial center before the EU was formed and it will still be after it leaves, but the transition will be painful. Cities like Milan and Frankfurt can’t absorb every function the British capital provides, but uncertainty makes it easier for them to poach from it.
The number of workers that leave London depends on negotiations that began this week. The worst case for the City of London, creating maximum uncertainty, is that the UK leaves the EU with no deal for selling services to the single market—perhaps an even more likely possibility back when prime minister May had a stronger position. But by the same token, with May’s electoral mandate for a hard, no-deal Brexit having been undercut, other key voices at home are putting their clout behind the City’s interests.
In a speech this week, chancellor of the Exchequer Philip Hammond argued for a comprehensive agreement for goods and services, a transitional period to ease the divorce, and a “frictionless” customs arrangement. He noted that 60% of EU capital markets operations take place in the UK, and indeed, some argue that Brussels has as much or more at stake if the link to the City’s services is severed. The Bank of England’s governor also came to the City’s defense.
The Square Mile has three main hopes in the Brexit negotiations: maintaining its access to talent in the EU, providing a transition period for the UK’s departure from the bloc, and ultimately arriving at a bespoke, special relationship.
Access to talent is a key issue for the City. Innovate Finance, a UK fintech association, says about 30% of its founders are non-British. The CEO of TransferWise, one of London’s highest-profile fintech companies, earlier this year said he would choose another city if he had to do it over again. Bloomberg News reported that the flow of talent to the UK was among his biggest concerns.
Arguably the UK, which has its own currency and is not part of the passport-free Schengen area, already had a special relationship with the EU. Meanwhile, no other national arrangement provides the ideal template. Norway, for example, has access to the single market but allows freedom of movement and has no control over regulations that are decided in Brussels. If the UK used such a model, it would go from being a primary architect of financial regulation to only an observer—an unacceptable outcome for a city that seeks to be a global financial center.
According to the Guardian, Michel Barnier, the EU’s chief negotiator, said in a private meeting that a special relationship with London is needed to avoid financial instability. Achieving recognition that the EU and UK’s regulations are equivalent could open the door to the flow of services, but that route is rife with uncertainties. That’s why financial firms are already making other plans.
Hammond’s speech also warned the EU about making a grab for a key pillar of London’s market plumbing, the business known as derivatives clearing. Clearinghouses aren’t the most exciting financial companies, but their role in safeguarding trillions of euros of derivatives transactions makes them systemically important. Hundreds of jobs, if not thousands, and financial clout are at stake.
EU officials argue that because many of the derivatives transactions taking place in London are denominated in euro, they should have heightened oversight, at a minimum, and perhaps the entire infrastructure should move to their shores. Still, the EU stance appears to leave more room for discussion than it did a year ago. The European Commission’s latest proposal stops short of demanding relocation, though it remains a possibility.
Hammond argued that Europe as a whole loses if clearing is fragmented, which would make the service more expensive for everyone. Bank of England governor Mark Carney backed up Hammond’s analysis and said a fracture could raise costs for EU firms by €22 billion ($24.5 billion) a year.
It will all depend on discussions between London and Brussels that will last at least until 2019. Prospects for the City of London, and hundreds of thousands working there, will be whipsawed by the brilliance and blunders in the coming negotiations, creating a climate that’s usually not considered business friendly. At the end of it all, there will likely be less finance in the financial capital than before.