By Ed Jenkins
For most of its post-war history, the UK’s financial services industry was a distinctly parochial institution, far removed from the commanding heights of the UK economy, and far outstripped by international competitors.
A mixture of surprisingly competent government policy, a favourable regulatory regime, geographical advantages, access to supportive industries and a good deal of luck enabled London, as well as peripheral centres in Edinburgh, Bournemouth and Northampton, to become a globally significant financial services giant.
It is worth bearing this recent history in mind as the industry braces for Brexit. Though London possesses immense strengths, it has no God given right to be the European financial centre. Its advantage in financial services can disappear as quickly as it came about.
The challenges to The City’s dominance are real, and well known. Local European policy makers are actively seeking to attract financial services companies and employees to cities like Paris, Frankfurt and Dublin. This is part economic opportunism, and part genuine desire to develop an alternative major financial centre within the Eurozone – which is viewed in European capitals as a strategic imperative.
This side of the channel, the government is, publicly at least, confident that financial services in London will continue to thrive. There are good reasons to think that London will be fine; competitive advantage and critical mass do not disappear overnight. London possesses a core of intertwined financial services businesses and expertise that will be hard for another city to replicate.
Though each of the main European pretenders to the crown have drawbacks, they are viable alternatives to London. Frankfurt is the current frontrunner with strong infrastructure, proximity to the ECB and supportive financial services networks, Paris has strong cultural attractions, while Dublin shares the same language and timezone as London, as well as a similar legal system. While it is not likely that these European cities will immediately supersede London, they may gradually chip away at the city’s activities.
The issue of passporting, the mechanism enabling UK financial services to cross European borders with ease, is key. If the UK were to leave the EU without an adequate agreement on trade, the consequences for UK financial services could be dire, forcing banks and asset managers who operate across borders to shift their location to an alternative city within the EU.
This outcome is not unlikely. Exit talks will be highly complex and potentially acrimonious, with a deadline, interspersed with European elections, of only two years from the triggering of Article 50. Faced with these negotiating challenges, the UK government has not once demonstrated it is up to the task, as demonstrated most recently by the admission from David Davis, the Secretary of State for Exiting the European Union that his department had made no contingency plans for Brexit under a ‘no deal’ scenario.
In the absence of a deal, UK financial services may be able to rely on ‘equivalency’ of regulations to maintain passporting rights. Though no country outside the EU has yet acquired this status, the UK would be well placed because the industry already complies with EU regulations. That said, this is not a contingency that well run financial services companies can rely on. If talks look like they are breaking down, many financial services firms may relocate as a hedge against the worst outcome.
Ultimately, it is impossible to predict the path Brexit negotiations will take, and the impact their outcome will have on UK financial services. It seems likely that the UK’s strength and competitive advantage in financial services will not be critically diminished in the short term. Neither will the industry come out unscathed. Where exactly we end up on this scale remains to be seen, and will depend much on the temperament of negotiators on both sides of the fence after the triggering of Article 50 next week.
Ed Jenkins is a member of Hume Brophy’s Financial Services team in London