Financial services must be at the heart of Brexit talks

Tony Ward

May 9, 2017

Tony Ward is chief executive of Clayton Euro Risk

As we approach the beginning of the end, in terms of negotiating our way out of the EU, one thing concerns me above all others: how we treat our financial institutions. I mentioned in my blog back in January that protecting the City from the worst of Brexit must be a priority.

Holding onto the single market and retaining passport rights were critical. Now it seems the latter isn’t going to come and a ‘hard Brexit’ is inevitable.

Warning signals from the commercial market

There is still no clear way forward as to how the government will support our financial institutions. Of course, we are unlikely to get further clarity until post-General Election on June 8 but this is all starting to worry me.

Last week, Goldman Sachs’ chief executive Lloyd Blankfein warned that London ‘will stall’ because of the risks created by the Brexit process. The views of the investment bank should not be taken lightly; it employs over 6,500 people in Britain.

“If you cannot benefit from access to the EU from the UK, and nobody knows what those rules and determinations will be, then the risk is there will be some adjustment that will cause some people to have a smaller footprint in the UK,” Mr Blankfein said.

While the Goldman boss said he did not think London’s growth as a global financial hub ‘will totally reverse’ because of Brexit, he offered this caution: “It might backtrack a bit, it just depends on a lot of things about which we are uncertain and I know there isn’t certainty at the moment.”

And there it is again. That word ‘uncertainty’. It is that uncertainty over what the terms of a Brexit deal will be that is encouraging UK-based banks, asset managers and insurers to push for a transition period once Britain leaves the EU. This will give time for adjustment. It is the lack of agreement between London and Brussels over an implementation period that will prompt firms to make a ‘premature’ decision to relocate, Mr Blankfein warned.

“Without knowing how things will turn out we have to plan for a number of contingencies,” the Goldman chief said.

Cities including Dublin, Frankfurt and Luxembourg are vying to attract banks away from London. Mr Blankfein said that Goldman had held discussion with other cities about potentially shifting staff from London.

And It’s not just Goldman Sachs. Hundreds of workers at JP Morgan will be moved to Dublin, Frankfurt, and Luxembourg as part of the US bank’s post-Brexit plans. Daniel Pinto, head of JP Morgan’s investment banking arm, said that the financial group would enlarge its three main European offices, with the loss of 500–1,000 jobs in the UK. “We will have to move hundreds of people in the short-term to be ready for day one, when negotiations finish, and then we will look at the longer-term numbers,” he stated in an interview with Bloomberg. JP Morgan has warned that as many as 4,000 jobs could move from London and its offices around the country – equivalent to a quarter of the bank’s 16,000 plus staff in Britain. “We have to plan for a scenario where there is no UK-EU passporting deal and we have to move a substantial portion of our business to continue serving our European clients,” Mr Pinto said. “We’ll have to wait to see what kind of deal can be achieved and see what we need to do from there.”

And just recently, the boss of the Lloyd’s of London insurance market, Inga Beale, warned of the ‘hidden impact’ of Brexit, predicting a downturn in the next four years caused by a prolonged pause in investment activity. Beale said time and resources that would normally be spent on innovation were instead being absorbed by preparations for Brexit. “We have to go on pause and that’s the hidden impact we’re not able to measure,” she said. “We have excellent people who are working on (Brexit planning). They can’t be working on something new. We’re talking four years down the line – you’ll see some sort of impact.”

This is all making me feel nervous. In the meantime, Philip Hammond is making soothing noises and trying to reassure the City over its future as a financial hub. This follows threats from Brussels to control euro-clearing, with the Chancellor warning that proposed EU changes could weaken financial stability. This is just not enough.

None of this feels good. We are in for a tricky time. While banks are unlikely to move their operations wholesale out of the capital, there will be adjustments and jobs will be relocated. It may not happen all at the same time but I suspect there will be a ‘creep’ over time and this could go on for some years to come. EY reports that close to half the investment banks in Britain have begun moving staff abroad and are reviewing the location of their headquarters. This is not bluster; these warnings need to be taken seriously – especially as, according to PwC, banks, insurance companies and asset managers produce approximately 12% of the UK’s economic output.

Not very uplifting. What will help post-June 8 is for the City to be given a clear steer as to how the negotiations will pan out. It would be foolish to do anything to damage the status of the world’s No. 1 financial centre.

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