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DatabankOctober 3 2016

IFCs jockey for post-Brexit spoils

London has long been the world’s pre-eminent international finance centre. But is this position under threat due to Brexit and the rise of Asia? Edward Russell-Walling investigates.
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While London has occasionally been challenged by New York, it remains the number one international finance centre (IFC) in The Banker’s 2016 ranking, with an indexed score of 100. New York is second with 95.1, followed by Hong Kong (75.1), Singapore (74.9) and Tokyo (69.7). Despite attempts by Paris and Frankfurt to take the crown, London has been the undisputed financial capital of Europe since the end of the 18th century.

The qualities that make a successful IFC include infrastructure, time zone, regulation, connectivity and workforce skills. London scores highly in all of these and is a classic industry ‘cluster’, with its self-reinforcing concentration of players and support services. It has the English language and, no small virtue, English law. At least part of its allure for non-UK firms, however, is the UK’s membership of the EU, which gives passporting rights into the rest of the EU for licensed institutions.

The potential loss of these rights threatens London’s attractiveness, some fear. Professional services firm PwC has warned that, without them, the city could lose its position as Europe’s strongest IFC. By PwC's own financial services attractiveness indicator, without passporting London would slip to second place behind Dublin, although the indicator does not factor in the attractiveness of IFCs as places to live.

Jobs on the move

PwC’s is not the only voice of doom. Mike Prew of property analyst Jefferies predicts that, in the event of London losing its EU passporting rights, 100,000 City jobs would move to continental Europe and that London office rents would fall by 18%. UBS has already said it might have to move 1500 jobs, Morgan Stanley 1000 and JPMorgan 4000. However, a subsequent report from property company Savills pointed out that there is very little suitable office space for banks in Paris, Frankfurt, Amsterdam and other IFC hopefuls.

Gary Campkin, director of policy and strategy at UK financial services champion TheCityUK, says that there are only two global financial centres: London and New York. And while he agrees that passporting issues need to be addressed, he suggests that this cuts both ways. “It’s about mutual market access,” he insists. “It’s also important that European corporates have access to Europe’s financial centre.”

Nevertheless, lesser European financial centres have been quick to react to the Brexit decision, in the hope of benefiting from any fallout. A recent Boston Consulting Group (BCG) survey of UK, US and German bankers named Frankfurt as the most attractive alternative location.

Frankfurt does indeed hope to benefit. “We believe London will remain the world’s foremost financial centre,” says Hubertus Väth, managing director of Frankfurt Main Finance, which markets the city as a financial centre. “But it will lose some business and Frankfurt is in a good position to gain some. We expect up to 10,000 jobs will move from London to Frankfurt in the next five years.”

Mr Väth estimates that 40% of the 250 banks in London chose that location for access to the EU. Alongside continued passporting privileges, Frankfurt would offer them proximity to the European Central Bank (ECB), “excellent” transport and communications infrastructure, a large and educated labour pool and an “open and very international” culture, according to Mr Väth.

Rivals assemble

Frankfurt, already home to the ECB and the European Systemic Risk Board, would also like to get the European Banking Authority (EBA), which will have to leave its London base when the UK departs the EU. Munich is also putting in a bid for the authority, but the case for Frankfurt is that EU monetary policy (the ECB) and bank supervision (the EBA) could be united in a single organisation.

Paris might also like to have the EBA if it did not already have the European Securities and Markets Authority. But it was quick to roll out the welcome mat for any would-be emigrants from London, promising to make its tax regime for expatriates the most favourable in Europe. “Now is the time to come to France,” declared French prime minister Manuel Valls in the immediate Brexit aftermath, unveiling a range of expat perks.

Paris’s problem is that France has a reputation as one of the least business- and bank-friendly countries in Europe. Firing employees there is even harder than in Germany (one of Frankfurt's disadvantages), and English is not as widely spoken.

Madrid, Warsaw and Vienna would also like to get their hands on the EBA. Warsaw argues that, as a rulemaker for all member states, the EBA itself should be based outside the eurozone. Poland is widely regarded as business friendly with flexible labour laws, though Warsaw ranks low on quality of life indices. Some bankers have said they would consider moving certain back-office operations there.

What about clearing? 

The City of London’s substantial insurance industry is also at risk, and Lloyd’s chairman John Nelson has warned that the market could move some operations elsewhere in the EU if it loses single market access. As insurers make contingency plans to set up subsidiaries in other member states, Dublin is proving to be a particularly popular alternative.

The Irish capital has the virtues of the English language, good schools and agreeable culture, all at a considerable discount on London prices. Ireland’s Industrial Development Agency has said it is already in discussions with potential clients. Dublin is, however, effectively a small town when compared with London, and is even further away from continental Europe.

One slice of City business clearly at risk is euro clearing, which the ECB has already tried, and failed, to contain within the eurozone. With the UK on its way out of the EU, and the recent vocal support of French president Francois Hollande, the ECB may try again with more success.

TheCityUK’s Mr Campkin does not accept that euro clearing will inevitably leave London. “I see no technical reason why we should lose it,” he says. “The skillsets are here. The US is content for US dollars to be cleared in London. China thinks it is incredibly important to have a major global centre active in renminbi clearing. It’s part of being a global currency.”

Indeed, London also competes with IFCs in Asia. It recently overtook Singapore as the second largest offshore clearing centre for the renminbi after Hong Kong, according to data from financial messaging network Swift. Hong Kong is an important gateway to China for Western finance and, in addition to its dominance in offshore renminbi, has developed a substantial presence in capital markets and asset management.

China has declared its intention to turn Shanghai into a more substantial IFC by 2020. But while both Shanghai and Shenzhen have shot up The Banker’s IFC rankings faster than any other cities this year, both have a long journey ahead.

An unassailable position?

Singapore is a gateway to south-east Asia, and is growing as a repository of private wealth. BCG predicts that it will overtake the UK as the world’s second largest offshore financial centre after Switzerland by 2020. But no Asian or even European IFC will challenge London overall for a very long time, according to many in the industry.

“Full-service global financial centres are built over centuries,” says Barney Reynolds, co-head of global financial institutions at US law firm Shearman & Sterling. “There have only been four in recent history: Antwerp, Amsterdam, London and New York, in that order.”

Mr Reynolds believes the City of London is wrong to want to retain or replicate EU passporting, which would be incompatible with UK sovereignty. Instead, he urges negotiators to focus on equivalence, meaning that the EU will recognise that a foreign regulatory regime is equivalent to its own. “Equivalence regimes have more in them than people realise,” says Mr Reynolds. While equivalence does not apply to standalone lending or primary insurance, it does cover investment business, including when undertaken by banks, he adds. “And, anyway, most City stuff is not cross-border in law.”

Some talk of London’s immense gravitational pull and point out that the passporting regime, which now attracts so much attention, only began in 2005. “Against that, the City has been doing well for 400 years,” says one City-based banking lawyer.

Mr Campkin at TheCityUK prefers not to characterise the rise of other IFCs, particularly in Asia, in terms of competition. “We need to embrace them,” he says. “As they develop, it’s important to align with them in ways that link into London and the UK, into British expertise and law. The rise of alternative financial centres should not necessarily undermine London. Our depth helps everybody.”

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