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An update on ‘Brexit & the City – the impact so far’

October 2019 • Brexitby Eivind Friis Hamre & William Wright

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This updated report provides the most comprehensive analysis yet of the impact of Brexit on the City and the wider banking and finance industry. More than 330 firms in banking and finance have moved or are moving business, staff, assets or legal entities away from the UK to the EU – and these numbers are likely to increase in the near future. 

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With just weeks to go until a potential ‘no deal’ Brexit – and a possible deal imminent – the latest report from capital markets think tank New Financial underlines the scale of the impact of Brexit on the City of London and the UK financial services industry.

We have identified 332 firms in the UK that have moved or are moving some of their business, staff, assets or legal entities from the UK to the EU to prepare for Brexit, which we think makes it the most comprehensive analysis yet of the impact of Brexit on the banking and finance industry.

Around 310 firms have chosen specific post-Brexit hubs for their EU business, and we have identified an additional 63 firms that are moving something somewhere since we published our initial report on the impact of Brexit on the City in March 2019 (an increase of 23%).

These moves are the inevitable consequence of the delay and uncertainty around Brexit, which has forced firms to prepare for the worst and put their Brexit contingency plans into action. The scale of relocations so far means that are close to the point at which firms in the UK have sufficient access to EU customers and markets through local subsidiaries that the value of equivalence or any future deal is relatively limited.

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 in terms of what it requires from firms in terms of their local presence.

The report found that:

* Dublin is by far the biggest beneficiary with 115 relocations (an increase of 16 compared with our initial report in March), well ahead of Luxembourg on 71 (+11), Paris on 69 (+28), Frankfurt on 45 (+5) and Amsterdam on 40 (+8).

* The post-Brexit landscape is much more ‘multipolar’ than before: nearly 50 firms are moving staff or business to more than one financial centre in the EU.

* There is a wide range in how different sectors have responded: for example, nearly half of asset managers, hedge funds and private equity firms in our sample have chosen Dublin, while more than three quarters of firms moving to Frankfurt are banks or investment banks.

The good news is that the contingency planning by banks, exchanges and asset managers – combined with recent agreements between UK and EU regulators – means that the industry is pretty well-prepared for whatever happens between now and October 31st.

The bad news is that we think the report understates the full picture. Many firms will have quietly moved parts of their staff or business below the radar and others have held off making a formal move until they have greater clarity.

Absent a comprehensive deal, we expect the headline numbers to increase significantly in the next few years as local regulators across the EU require firms to increase the substance of their local operations.

Summary

Here is a short 10-point summary of the report:

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. Over 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 permission’s 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.

The full report:

The full report ‘Brexit & the City – the impact so far’ includes the following:

1) A summary of the main findings

2) A map and infographic summarising how more than 300 firms are responding to Brexit and which financial centres they have chosen as their post-Brexit hub

3) A summary of the main moves to different financial centres broken out by primary moves (EU hubs) and secondary relocations

4) A summary of what has changed since our initial report in March 2019

5) Analysis of how firms in different sectors are relocating to different financial centres in different ways

6) A summary of the remaining concerns that firms and regulators have about Brexit

7) A summary of the implications of this report for the future of UK and EU financial services

8) A detailed appendix of relocations by individual financial centres including: Dublin, Luxembourg, Paris, Frankfurt and Amsterdam

9) A detailed appendix of relocations by sector of activity including: asset management, banks and investment banks, diversified financials (trading, exchanges, market infrastructure and fintech), insurance, alternatives (hedge funds and private equity)

About New Financial:

New Financial is a capital markets think tank launched in 2014. We’re having a growing impact among senior industry leaders and policymakers across Europe on making the case the case for bigger and better capital markets. We’ve hosted more than 100 private events and published more than 30 in-depth reports. New Financial is a social enterprise funded by institutional membership from across the capital markets industry.

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