London has flourished as a financial center over the past two decades in part because global banks could sell their services freely around the European Union’s 28-nation trading bloc from their offices in the City of London. Now that British voters have elected to leave the EU, and Prime Minister Theresa May says that will mean withdrawing from the single market, London’s status as a worldwide banking hub is under threat. If Brexit curtails U.K. firms’ access to Europe’s $19 trillion integrated economy, London becomes a far less attractive place from which to do business.
1. What businesses might be on the move?
An obvious candidate is clearing, a service provided to help traders complete their transactions safely and at the price at which they were executed. Clearinghouses such as those that call London home collect fees to act as intermediaries between buyer and seller, requiring traders to post collateral -- cash or bonds -- as a cushion against losses and potential defaults. If the U.K. were stripped of the right to clear euro-denominated derivatives, 232,000 British jobs could be at risk, according to London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet. Other bank businesses that could be part of an exodus from London include euro-denominated derivatives and corporate bonds, while specialties such as commodities and foreign exchange would likely stay in London no matter what, according to a report by the Boston Consulting Group.
2. What’s at stake for London?
U.K. companies losing all access to the single market would cost banks and associated businesses almost 40 billion pounds in lost revenue and put 70,000 British jobs at risk, according to consultant Oliver Wyman & Co. Executives at banks including Morgan Stanley, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co. have said they would have to move staff and operations out of Britain to service their EU clients if that happened.
3. So what’s the U.K.’s plan?
In her Jan. 17 speech, May said the “bold and ambitious free trade agreement” she wants with the EU would encompass tariff-free trade and safeguard the rights of London-based banks to provide services across the continent with ease. She was light on details, so it’s not clear what kind of access to the single market she wants, let alone whether it can be achieved. EU leaders keep repeating she can’t “cherry pick” just the good parts of the current relationship.
4. What are the banks pushing for?
British bankers have lowered their sights when it comes to securing a Brexit deal that will safeguard the U.K.’s biggest industry. After months of pushing to keep unrestricted access to the single market, TheCityUK lobby group diluted its demands in January. It’s no longer seeking so-called passporting, which allows global banks with bases in London to provide services to the rest of Europe. Instead, banks are now increasingly focusing on securing a version of regulatory “equivalence,” or an official recognition by the European Commission that the U.K.’s rules and oversight of specific business lines are as tough as its own. That would pave the way for a continuation or resumption of certain cross-border business.
5. What rival EU city might challenge London?
Frankfurt and Dublin are emerging as the biggest winners at London’s expense as banks prepare for Brexit by planning new EU hubs. Standard Chartered Plc and Barclays Plc are considering Dublin, Ireland’s capital, for their EU base while Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley are eyeing Frankfurt. But no other European location quite matches the City of London’s depth of markets, breadth of expertise or regulatory appeal. While banks will move some operations to the continent to ensure access to its market and activity in its time zone, they could ultimately move even more across the Atlantic if New York proves the only other genuine one-stop shop for business after Brexit.
6. Would non-British bankers in London be sent home?
May has said she cannot guarantee the rights of EU citizens living in Britain without reciprocal agreements from her European counterparts. EU nationals who have lived in the U.K. for at least five years have a right to stay permanently, and vice versa. The Czech Republic and other central eastern European countries are particularly animated about ensuring that the rights of their citizens to work in the U.K. are protected after Britain formally exits the EU, with some threatening to veto any deal that doesn’t allow for that. There are about 3.2 million EU migrants living in Britain, according to the Office for National Statistics. The United Nations estimates that about 1.2 million people born in the U.K. live in another EU country.
The Reference Shelf
- A QuickTake Q&A explainer on London’s dominance of the clearing business.
- Another QuickTake Q&A explaining the "hard Brexit."
- The Boston Consulting Group’s white paper on the impact of Brexit.
- Oliver Wyman’s report on the impact of Brexit on U.K. financial services.
- The big winner from Brexit could be New York.
- Bloomberg View’s Mark Gilbert says London bankers might like Paris.
- Sign up for Bloomberg’s Brexit Bulletin newsletter.
- Follow @Brexit on Twitter for full coverage of Britain’s exit from the EU.