BusToday_Bnr_PRDay

16th October 2019

Brexit & the City: the impact so far

 

The full report can be found here

Some of the highlights of the report are:

 

  • We have identified more than 330 firms that have responded to Brexit by relocating part of their business, moving some staff, or setting up new entities in the EU. This is an increase of 63 firms or 23% since we published our initial report in March.
  • Most of the additional moves that we found are by smaller firms preparing for Brexit: for many larger firms, Brexit effectively happened some time last year.
  • Dublin has extended its lead in terms of attracting business from the UK, with 115 firms choosing the Irish capital as a post-Brexit location (an increase of 16 since our report in March). This represents nearly 30% of all the moves that we identified, well ahead of Luxembourg with 71 firms, Paris with 69, Frankfurt on 45, and Amsterdam on 40.
  • Paris has benefited most from the more recent relocations, with 28 moves - over 40% of the additional firms since our last report in March.
  • In the event of a deal, we do not expect firms to reverse their relocation decisions: firms will wait until they have clarity on what Brexit looks like before making any final decisions (which may not come until the end of 2020 or beyond).
  • In the event of No Deal, we expect the number of staff and assets being oved to the EU to increase quickly and significantly.

 

Over time, we expect the headline numbers of firms, staff, and business to increase significantly as the dust settles on Brexit, temporary arrangements agreed between the EU and UK expire, and local regulators require firms to increase the substance of their local operations.

 

The scale of the Brexit-related relocations means that we are close to the point at which firms in the UK have sufficient access to EU customers and markets through local subsidiaries that the future value of equivalence or any other deal is relatively limited (except perhaps for CCPs and stock exchanges).

 

With such access in place, the UK may be able to focus more on developing its business with the rest of the world and worry less about close alignment with EU regulation to ensure it retains equivalence. However, any significant moves by the UK away from alignment with the EU will likely prompt the EU to raise the bar for what it requires from firms in terms of their local presence.

 

There is a 10-point summary of the report below.

 

Brexit & the City: the impact so far

 

1) A big headline number: we have identified 332 firms in the UK banking and finance industry that have responded to Brexit by relocating part of their business, moving some staff, or setting up new entities in the EU.  This is an increase of more than 60 firms (or 23%) since our initial report in March. These moves cover a wide range: from an asset management firm setting up a new authorised entity in Luxembourg to a bank like Barclays moving £160bn of assets to Dublin.

 

2) A significant underestimate: we think our analysis is the most comprehensive yet of the impact of Brexit, but we know that the numbers significantly understate the real picture. Over time, we expect the headline numbers of firms, staff, and business to increase significantly as the dust settles on Brexit, temporary arrangements agreed between the EU and UK expire, and local regulators require firms to increase the substance of their local operations.

 

3) The damage is done: for many firms in banking and finance, Brexit effectively happened last year.  The political uncertainty since the referendum has forced firms to assume the worst case scenario of a ‘no deal’ Brexit with no transition period, and to prepare accordingly. Many large firms have had their new entities in the EU up and running for months, and having spent tens or hundreds of millions of dollars on relocation are not going to move business back to the UK anytime soon. The scale of relocations significantly reduces the potential benefit of the granting of equivalence or of any potential future deal in financial services between the UK and EU.

 

4) And the winner is…: Dublin is the clear winner in terms of attracting business from the UK, with 115 firms choosing the Irish capital as a post-Brexit location (an increase of 16 since our report in March). This represents nearly 30% of all the moves that we identified, well ahead of Luxembourg with 71 firms (+11), Paris with 69 (+28), Frankfurt on 45 (+5), and Amsterdam on 40 (+8).

 

5) A multipolar world: no single financial centre has dominated these relocations. Many firms have deliberately split their business and chosen separate cities as hubs for different divisions, and we identified 48 firms that are expanding in other EU cities in addition to wherever they have chosen as their main post-Brexit hub. 

 

6) Sector specialisation: different financial centres have attracted different firms based on their sector of activity. Nearly 40% of all asset management firms that have moved something as a result of Brexit have chosen Dublin. Three quarters of the firms that have chosen Frankfurt as their main EU base are banks, while two thirds of firms moving to Amsterdam are trading platforms, exchanges, fintechs or broking firms.

 

7) Jobs on the line: we think the debate about how many staff have been moved so far and whether that is higher or lower than expected a few years ago is a red herring. Firms are keen to move as few staff as possible until they know what Brexit looks like and until they have to. This could change quickly: in the event of a No Deal Brexit, we expect firms to significantly increase staffing in their local EU operations.

 

If there is a deal, this expansion may not happen until after the end of a transition period.  That said, we have identified nearly 5,000 expected staff moves or local hires in response to Brexit, but this is from only a small minority of firms and we expect this number to increase. Note: we have not updated this part of the analysis since March.

 

8) A shift in scale: the scale of business, assets and funds being transferred from the UK is far more significant. Only a small number of firms have said what they are moving and already the numbers are very large: £800bn in bank assets is around 10% of the UK banking system. The final tally is likely to be much higher, which will reduce the UK’s tax base, supervisory influence and ultimately have an impact on jobs. Note: we have not updated this part of the analysis since March.

 

9) A loss of influence: the shift in staff, business, assets and legal entities will gradually chip away at the UK’s influence in the banking and finance industry not just in Europe but around the world, as a greater proportion of business is authorised by and conducted in the EU. It could also significantly reduce the UK’s £26bn trade surplus in financial services with the EU.

 

10) The impact on the City: while the headline numbers are stark, there is no question that London will remain the dominant financial centre in Europe for the foreseeable future. Firms are keen to keep as much of their business in London as possible and even the biggest relocations represent a maximum of 10% of the headcount at individual firms.

 

There is also a small boost to the City from the ‘reverse Brexit’ effect. We identified a small number of EU firms that have already applied for authorisation in the UK, and more than 1,000 firms from the EU27 have applied to the Financial Conduct Authority’s ‘temporary permissions regime’.

 

However, it’s important to note that far more business flows from the UK to the EU than the other way round: in 2016, 5,500 firms in the UK used more than 336,000 passports to sell to the EU. Around 8,000 firms in the EEA used 23,500 passports to offer services in the UK.

 

 

-ENDS-

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