Finance's British predicament

London's financial services industry is arguably the economic sector that will be affected most by a hard Brexit. It is also the loudest one in promoting a soft one. But being loud is not always equivalent to being effective.

BY C.RUMPELNIK

In London's buzzing city center, investment bankers and hedge fund managers in dark blue suits, the obligatory cell phone pressed to their ears, form an essential part of the urban landscape, contributing to the cosmopolitan charm tourists from Europe and all over the world are so fond of. In the foreseeable future, though, the same tourists might not have to cross the channel in order to enjoy the spectacle of watching financial monoliths of the likes of Goldman Sachs chasing after profitable trades and investments.

The Brexit vote of June 2016 is seriously jeopardizing the future of London as the hub of the financial service industry in Western Europe. In fact, it was always clear that the UK’s “divorce” from its European partners would not be beneficiary for (almost) any economic sector. Particularly, it would wreak havoc on the financial services industry, for the success of which access to the European single market has been and is still critical. Indeed, Goldman Sachs, a renown investment bank, repeatedly warned that Brexit would have a “disastrous” effect on the European financial sector, predicting a 35 billion Dollars drop in profits as a result.


The British electorate, however, traditionally unsusceptible to the concerns of "shady Investment Banks like Goldman Sachs, turned a deaf ear to ist prophecies of doom, putting at risk up to 70.000 mid-level Jobs related to the City's financial institutions, according to TheCityUK, an industry Body (see graphic, data: Bloomberg).

The banks’ concerns with Brexit lie with one particular issue: Albeit not being a member of the Eurozone, in the past the United Kingdom has been granted so-called passporting rights, allowing banks based in the UK to promote and sell their products throughout the European Union while enjoying lax British regulation and taxation. The loss of these passporting rights would bar London-based investment banks from processing their European business affairs through their London headquarters, consequently forcing them to set up subsidiaries on the continent or relocate completely to Dublin, Frankfurt, Vienna or Milan, although neither of them can boast the financial infrastructure or business-friendly environment firms have been enjoying in the United Kingdom.
Some mid to high-level banks have already made the move and ditched the City: The Russian investment bank VTB capital that employs several hundred people in London has announced it will move its headquarters to either Frankfurt, Paris or Vienna come to 2017.

Whether others will follow the example set by VTB, will largely depend on the outcome of Brexit negotiations: Goldman Sachs has revealed plans to move an unspecified number of jobs to a rival European city if London were to lose its passporting rights. Similar plans have already been drawn up by both Citigroup and Morgan Stanley, with the head of Morgan Stanley International, Rob Rooney, telling the Financial Times, “It really isn’t terribly complicated. If we are outside the EU and we don’t have what would be a stable and long-term commitment to access the single market, then a lot of the things we do today in London we’d have to do inside the EU 27.”

Yet, moving corporate headquarters from London is a costly Operation that banking firms would rather avoid. Moreover, the reasons why London has been able to essentially monopolize financial Services have not simply evaporated: Banks are still concerned about taxes, bureaucracy and a lack of stability and continuity in economic policy, particularly with many European governments being under pressure from populist, anti-establishment movements that capitalize on broad resentment against "the Banks" and scapegoat investment firms such as Goldman Sachs for the recent slump in economic growth and a rise in unemployment. Hence, it would be politically difficult, to put it carefully, for European governments to relax comparatively strict regulations to match London's competiveness. Therefore, the British and international financial Services industry has decided to take a last effort, mounting a (capital-) intensive campaign lobbying for a soft Brexit, including the preservation of European market Access, free movement of people and, most importantly, passporting rights.

So far its success has been limited. Sources close to Brexit Minister David Davis told the Guardian that he and the UK government were in no way willing to even soften their stance on immigration and free movement to safeguard the financial services industry's interests. Instead, they are focusing on striking an so-calledequivalency agreement, which Anthony Browne of the British Bankers’ Asssociation views critically:

“The EU’s equivalence regime is a poor shadow of passporting – it only covers a narrow range of services, can be withdrawn at virtually no notice, and will probably mean the UK will have to accept rules it has no influence over. For most banks, equivalence won’t prevent them from relocating their operations.”

The financial Services industry sector has long been viewed as disproportionately strong and influential in the UK and even been described (and not only facetiously) as a puppeteer with the British Prime Minister at its strings. And indeed, there have been disproportionately many contacts between the the financial services industry and UK officials, involved in designing Brexit strategies and policies. So why has the British government not fallen in line?

Maybe because the financial Services industry itself is far from united in its efforts. Animosities within the banking community and between investment banks and other financial institutions, namely insurance companies, local banks and smaller trade bodies that feel that a task force spearheaded by the City’s biggest and most powerful investment banks will fail to protect the interests of smaller companies have prevented the industry's lobbies to tap their full potential.

Initially a separate group of executives, headed by the chairman of the British arm of Banco Santander, Shriti Vadera, was set up to steer negotiations in a direction favorable to the  industry. In October, it was subsumed into the TheCityUK, a larger, more inclusive and consequently ponderous body. But why completely restructure those organizations only months after setting them up? "It was a complete dog's breakfast. There were a lot of egos involved," an employee of one international bank involved in the talks told Reuters  "The groups weren't connected on content or policy." The same official suggests that everything is now "reined in". Yet it is still unclear, which executives and organizations are responsible for representing the industry as a whole. Several of the most prominent banks made it clear that they want to be an integral part of the talks and “will not be intermediated”.

In the meanwhile, the British government has done nothing but add fuel to the fire: The head of one of a large British bank told Reuters that his and other firms are frustrated about Prime Minister Theresa May taking meetings with American banks in New York while declining to meet British institutions in London. International Banks, on the other hand, felt snubbed when they were not invited to a meeting between Philipp Hammond, Chancellor of the Exchequer, and representitives of British banks in London.

To top it all, some corporations (which are drawing their profits largely from the UK market itself), most prominently Hargreaves Lansdown, a Bristol-based financial Services firm, are pushing for a hard Brexit behind the scenes, to “stick it” to American and Japanese firms, who would suffer most from a "clean break" between UK and European Union. 

Hargreaves Lansdown founder Peter Hargreaves also supported the Leave campaign, arguing that Brexit would create a situation of “effective insecurity”. So partly his expectations have been met. The current situation is one of utmost uncertainty (that is irrefutable). It does not seem very effective, though. At least for firms other than Hargreaves Lansdown and most of all the 70.000 city employees fearing redundancy. Hence, Angela Knight, a former conservative MP, chairman of Energy UK and advisor to the British Banking Association, has called on investment firms to get their act together and support the government in Brexit negotiations:

"If the different groups keep on going either to the government or to Europe saying 'do this' or 'do that', then all that will happen is government and Europe will say, 'well the Brits don't know what they want in financial services' and so you will get what you are given,"

Yet, at this point it seems highly unlikely that a united front, capable of effectively representing the industry's interests will emerge. That makes even small yet crucial concessions by the European Union, such as granting a transitory period with concern to passporting rights, more unlikely. Which in turn will deal yet another blow to London's financial service industry and accelerate the exodus of (international) investment firms from th UK. A case in point for the negative effects of  lacking strategy and poor lobbying. And Brexit, of course.