London is the fintech capital of Europe—and, many would argue, the world. But in the aftermath of the UK’s vote to leave the European Union, many are wondering whether it’s about to lose that title. If the world’s largest banks pack up and relocate to the likes of Frankfurt, Paris or Dublin, the fintech startups that rely on their business would likely follow.
The Financial Times reports that some large banks are already making plans to move at least some jobs and operations outside the city. As of yet, no single bank has confirmed such reports—perhaps because there’s still a fair amount of uncertainty about what the Leave vote actually means.
The majority of Great Britain’s voters have declared their support for leaving the EU. But some politicians in the Leave campaign, including former London mayor Boris Johnson, have intimated that the vote is so tight it will instead be used to bargain with Eurocrats over immigration and agricultural policy–the two reasons commonly cited as to why Britain should exit the EU. Assuming the UK is able to achieve concessions in these two areas, it might decide to stay after all.
Even if Great Britain does leave the EU, it already abides by all European banking rules and regulations. That means there are only two reasons why banks might decide to leave London.
The first is if Great Britain diverged from European regulatory structures for financial services. This would not be in Britain’s best interests, as it would create a two-tier structure that would prohibit some banks from managing common operations across Europe, while forcing banks to create one set of operations in Britain and another in Europe.
The second reason is if the EU decides to punish Britain by prohibiting its banks to “passport” across Europe—a possibility suggested over the weekend by Francois Villeroy de Galhau, the head of France’s central bank.
The passport program allows any bank to operate in all of Europe’s countries so long as it has a license from any EU member state. As a non-member of Europe, the UK would presumably lose that right. All of London’s overseas banks would need to obtain separate banking licenses and offices for each European member state it wished to do business in.
If the UK lost its passport, this would encourage large US banks and their brethren to move substantial operations to Paris and Frankfurt for trading, and to Dublin for back-office operations. Should those resources move, the communities that focus on finance, such as fintech startups and challengers, would move with them.
Such a decision would pose a real threat to London, the British economy, the rise of UK’s fintech industry, and by extension all other aspects of financial services in Europe. It would also create a lot of headaches for American, Indian, Chinese, and Australian banks, many of which have chosen London as their European base because of its deep talent pool, market knowledge, and accessible language and culture.
However, there is some hope for the financial sector yet. The EU’s existing relationships with countries such as Norway and Switzerland suggests such a doomsday scenario is unlikely.
Europe wants to trade with Norway and Switzerland, neither of which belong to the EU. So it allows Norway’s banks to passport under agreements in the European Economic Area, as do banks from Iceland and Lichtenstein. Switzerland is also completely separate from Europe, but has bilateral agreements to passport their financial services across the continent. This works to the benefit of European countries because Norway has the largest state-owned investment fund in the world, while Switzerland manages the assets of many of the world’s wealthiest individuals. This brings increased liquidity and investment to Europe.
All in all, there is a great deal of uncertainty about Great Britain’s future. But removing the passporting of bank licenses would hurt both the UK and Europe. It would badly injure the British economy (the banking sector generates over 10% of its annual GDP) by fracturing the financial system and forcing many international banks to switch offices from London to mainland Europe. And it would put a dent in European prosperity, as the uncertainty of such changes—and their consequences—could take years to work out.
This is why it is much more likely that Europe will adopt a more moderate and non-punitive approach following the Brexit vote. Assuming the EU doesn’t go after the UK, the position of London as a fintech hub will remain as strong as it ever was.