Britain’s decision to leave the EU is historic, and investment analysts, hedge fund managers and accountants in London are all wondering if the major banks will go or stay.
Opinions are sharply divided on the issue, so here’s a look at both sides – provided by Lloyd Wells – a freelance writer working with a range of accountants in London.
It’s taken just 30 years for the City to become international, with US and other global banks now the dominant players. The presence of numerous large international banks in London is due in part to the EU principle of ‘passporting’, the process that permits, without restrictions, access to the European single market. And it’s for this reason that many banks have warned they’ll move to other European countries once Britain’s exit from the EU has been finalised. HSBC said that almost 1,000 UK posts could be relocated to Paris and JP Morgan said 4,000 UK jobs may be lost.
Newsweek, on the other hand, believe there are three major reasons the hub of Europe’s banking will continue to be London.
- Britain’s tax structure and employment regulations, which are highly conducive to the finance industry’s health and profits
- The strong British court system, which upholds the rule of law regarding creditors and shareholder rights
- Britain’s world-leading university education in Finance and Economics
Protecting shareholders and creditors’ interests from the mercenary behaviour of competitors or the state is very important, and here Britain comfortably leads Europe. The UK ranks 4th in shareholder protection, behind only Hong Kong, Singapore and New Zealand (France is 29th and Germany 49th). In world rankings in the protection of creditor rights, Britain is 19th, while France is a lowly 79th, and Germany 28th. The rule of law in Europe could improve, so that financial investors become as well protected in Frankfurt or Paris as they are in the UK, but this process can take years, even decades.
In terms of education, financial markets require a deep understanding of Economics and Finance, and a superior knowledge of the legal structures underlying financial services. British universities are once again leaders of Europe in offering this education. According to a recent survey, 6 British universities are among the top 50, while only 3 continental European universities – 2 in France and 1in Holland – rank. In addition, 4 of the top 5 European Masters Degrees of finance programmes are based in London.
As far as tax and employment regulations go, the financial services industry in Britain is streets ahead and benefits from much lower corporate tax rates and more flexible employment laws. A World Bank business survey ranked the UK 15th in the world on paying taxes, well ahead of Germany (72nd) and France (87th). And Britain is the overall leader for flexible labour regulation. This is particularly important as the financial sector annually employs and lays off tens of thousands of employees.
How does it affect the US Banks?
The chief of the U.S. central bank and top monetary policy setting official, Janet Yellen, alerted that Brexit “would negatively affect financial conditions and the U.S. economy.”
Some banks — particularly large US ones — are activating contingency plans and sounding out regulators on licences required outside the UK. Executives are being prepared for an eventual move to other countries. Sky News even claims many banks have already hired for roles in European cities in the wake of Brexit.
Is foreign exchange trading in London at risk?
The City of London is without doubt the leading player in foreign exchange trading and has been for decades, but Brexit has made this position now appear vulnerable.
The European Central Bank has made a few attempts to bar clearing houses not inside the Eurozone from handling the Euro. So far it has failed, but many analysts believe the UK has only succeeded because of its membership of the EU. Once outside, they believe Britain will lose most of its Euro business.
So, where would foreign banks now based in London move to? Most likely to a spread of Eurozone locations where they already operate – Frankfurt, Paris, Dublin, Lisbon and Warsaw are some of the options. If they do move, this would result in the breaking up of Europe’s financial services industry and weaken Europe’s ability to compete internationally. The City of London would almost certainly become less international.
According to Bloomberg, the Chief Executives of HSBC and Société Générale feel it’s too early to say if they’ll move out of London–their decision will only be made when Brexit actually happens. HSBC says it’s too early to tell which divisions of their business will be affected by Brexit.