The finance city of London three fate in the future
As a worker in the City of London for 20 years — first in a lowly role at the Bank of England, then in a mid-ranking position at the now defunct Association for Payment Services — Theresa May would not have imagined her current quandary.
Now prime minister, Mrs May faces the daunting prospect of negotiating Britain’s divorce from the EU while at the same time protecting the country’s key interests.
Close to the top of that list is the City’s role as a financial services hub and an anchor for the UK’s biggest industry, worth as much as 10 per cent of gross domestic product. Depending on how successful Mrs May is, the City could face three different futures.
Brexit could offer an opportunity to maximise London as a less regulated offshore centre for renminbi trading, private banking or fintech, making use of the UK’s timezone advantage between Shanghai and New York.
If London loses its role as a gateway to European markets, then the City could seek to emulate places such as Singapore — which is able to attract business from Asia’s powerhouses through light touch regulation and a favourable tax regime. Despite its small size, the city state is ranked by Z/Yen, a consultancy, as the world’s leading financial centre behind London and New York.
The UK could turn into a sort of souped-up Singapore “if the offshore part picks up the slack left by the departure of some European businesses,” said a managing director in government affairs at a large bank.
Britain already has a growing presence as a base for offshore renminbi trading and in April unseated Singapore as the second-largest clearing centre after Hong Kong for the currency.
The Swiss bankers’ association has proposed an “F4” alliance between Switzerland, London, Hong Kong and Singapore to pool ideas and resources to co-ordinate positions on global financial regulation and access to the EU market.
Once out of the EU, the City could potentially backtrack on some of the bloc’s regulations that it most dislikes, such as curbs on bankers bonuses. But detractors point out that deregulating while also remaining “equivalent” so as to retain single market access would be tricky.
Damian Kimmelman, co-founder and chief executive of tech company DueDil, said Brexit provides a great opportunity to galvanise London’s fintech industry to redesign its entire infrastructure using technologies such as blockchain and confirm the UK “as the fintech centre of the world”.
The biggest blow to the City would be the loss of the crucial “passports” banks and other financial institutions use to sell services and raise funds in other EU markets from London.
Cities such as Paris, Frankfurt and Dublin are already rolling out the red carpet for banks, and further afield Singapore New York and Dubai could also go in for the kill.
A Treasury analysis this year suggested up to 285,000 financial sector jobs could be at risk after a Leave vote. The worry is that when banks leave London, the professional services firms who work with them would follow over time.
This would be compounded by a dearth of foreign direct investment and a struggling UK economy.
“It is bleak,” said one bank boss: “We are going into recession, no question about it. Five years from now the City might find a way to grow again but it will be a long way behind where it could have been.”
A campaign on immigration — one of the most sensitive issues in last month’s EU referendum — could also make the position of the City’s foreign workers vulnerable. Nearly 11 per cent of the City’s 360,000 workers come from elsewhere in the EU, according to the latest census.
And London’s location as home to the world’s principal place for trading the euro — a $2tn a day market — may also come under further pressure after previous EU attempts to shift more of the business to the eurozone.
Other countries are closely watching the City’s ties to the EU — notably China, whose banks recently picked London as their European financial base of choice.
Mark Boleat, policy chairman at the City of London Corporation, said Brexit was “not helpful to our relations with China”.
Under a scenario where the UK is able to fudge some sort of access to the single market, London could carry on almost as before.
The key would be EU rules known as Mifid 2, which allow other nations with “equivalent” regulatory standards to operate right across the single market in sectors such as trading.
Banks would retain a large core presence in London. The question would be where they put new hires, rather than where they move existing employees.
Lord Levene, who chairs Tikehau, a French investment boutique that recently relocated to London, said: “People want to live and work in London. What leaves will be pretty much on the margins.”
Similarly, asset managers may well keep their headquarters in London. But many already have Luxembourg and Dublin domiciled funds and could shift more business to those centres and locate euro-denominated business inside the EU.
Euro trading could also stay in London. Roger Liddell, the former chief executive of LCH.Clearnet, said: “If you start to divide up portfolios by currency you create a huge amount of inefficiency and a greater degree of risk.”
Karen Briggs, head of Brexit at professional services firm KPMG, added: “There are a number of aspects that take us away from the doomsday post-Brexit scenario: the UK’s infrastructure, its trusted legal system and its strong resource and talent pool . . . It is still attractive to work in London and the UK.”