Will London Survive Brexit?

by Howard Davies

Howard Davies is Chairman of the Royal Bank of Scotland.

LONDON – Brexit has set a hungry cat among the financial pigeons of the City of London. No one yet knows what kind of access to the European Union’s single financial market UK-based firms will have, and Prime Minister Theresa May’s call for a general election to be held on June 8 has further clouded the picture, at least in the short term. But there is a nagging assumption that things cannot remain the same, and that there will be a price to be paid for leaving the EU.

So UK-based financial services firms, especially those that have chosen London as their European headquarters precisely in order to secure access to the whole EU market from one location, are reviewing their options. Indeed, regulators are obliging them to do so, by asking how they will maintain continuity of service to their clients in the event of a “hard” Brexit. (May’s government prefers to talk of a “clean” Brexit, but that is semantics).

Rival European centers have spotted an opportunity to claw some of this business back to the continent (or to Ireland). Other governments have long resented London’s dominance. It was galling to have to acknowledge that the principal center for trading in euro-denominated instruments lay outside the eurozone.

Just a few years ago, the European Central Bank tried to insist that the clearing of euro instruments should take place within its jurisdiction, but was prevented from doing so by a ruling from the European Court of Justice. That is somewhat ironic: removing the UK from the ECJ’s jurisdiction is now one of May’s principal aims.

So delegation after delegation of ministers, mayors, and assorted financial center lobbyists have been filling London’s best hotels and providing a welcome boost to the high-end restaurant trade. Luxembourg, Frankfurt, Dublin, and others have been making glossy presentations about their cities’ competitive advantages over London: lower property costs, lower corporate tax rates (that sounds plausible when claimed with an Irish accent), Michelin-starred restaurants, and Porsche dealerships – all the essential services that make up a vibrant financial center.

Some of these presentations have raised a wry smile or two. French President François Hollande was elected on a claim that the world of high finance was his enemy. Yet the president of the Paris region recently promised a “red, white, and blue carpet” for any hedge fund manager who buys a one-way Eurostar ticket to the Gare du Nord – a barbed reference to former UK Prime Minister David Cameron’s promise of a red carpet for French bankers fleeing prohibitive tax rates, strikes, and restrictive labor laws.

Suddenly, everyone loves those masters of the universe who nearly destroyed the world’s financial system in 2008. What goes around comes around.

All this promotional activity has raised anew the question of just what combination of characteristics a successful financial center must have. The question has been asked many times, and management consultancies have earned good money offering their patent answers.

A pre-crisis study by McKinsey for former New York City Mayor Michael Bloomberg recommended copying London’s regulatory system, which blew up soon thereafter. Hong Kong officials’ review of their own regulations, carried out to identify ways to boost the city’s attractiveness to international firms, found that what firms really wanted was cleaner air and more international schools. Neither is within the jurisdiction of the monetary authority (or even, in the case of air pollution, of the Hong Kong government).

Many of the surveys asking firms why they choose a particular location produce essentially circular answers. They say they are there because other firms are, and they can therefore conduct business easily with their principal counterparties. There are, however, a few consistent themes.

Foreign firms like to think that they are treated no differently from domestic competitors. So politically driven regulation is a turn-off. They also want an independent court system that upholds property rights. And they want access to skilled staff.

On these measures, London and New York continue to do well. The latest Global Financial Centres Index, published last month by Z/Yen, shows that London remains at the top of the league, marginally ahead of New York.

But the ratings of both have declined sharply over the last year, and the gap between them and third-place Singapore, more than 30 points last year, is only 20 this year. Indeed, almost all of the Asian centers have lifted their ratings, with Beijing rising the fastest, moving from 26th to 16th place.

If we look specifically at Europe, the only other financial center in the global top 20 is Luxembourg, which creeps in at 18, six places lower than last year. Frankfurt, at 23, fell four places this year, and Paris has been stuck at 29 for the last couple of surveys. So London has a huge lead in Europe.

Will Brexit be enough to alter that picture fundamentally? It remains hard to say. On the key factors for firms, London’s nationality-blind regulatory system is not likely to change; nor is the court system. So those advantages should be sustained.

The key swing factor is likely to be the availability of skilled staff. London-based financial firms are accustomed to being able to recruit from across the EU; indeed, the British authorities have been flexible on non-EU staff, too. Because most aspiring finance professionals in Europe can speak good English, firms have had a deep pool in which to fish.

Whether that pool survives Brexit will turn out to be the biggest political question for the City of London in the coming negotiations. The next UK prime minister, who just might be May, will need to produce a good answer, or London will not remain at the top of the league for much longer.


Howard Davies is Chairman of the Royal Bank of Scotland.

Copyright: Project Syndicate, 2017.
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