Betting the house? How Brexit gamble could bring down the City
|
Version 0 of 1. Flanked by pop art from Andy Warhol to Jasper Johns, top officials from one of Wall Street’s biggest banks will gather at the British Museum for a bittersweet moment. A month from now, the assembled financiers will sip champagne and nibble canapés to celebrate the 40 years Morgan Stanley – sponsor of the museum’s American Dream exhibition – has had a presence in the UK. But as it toasts its past on 22 March, Morgan Stanley will also be asking critical questions about its future in the UK. When Theresa May triggers article 50 – likely to happen within days of the event – she starts the two-year Brexit process that will help determine how banks shape their operations in the UK over the next 40 years, and whether the City can retain its dominance as Europe’s biggest financial centre and a go-to location for major international banks. The City of London – which has faced heavy criticism for financial risk-taking – now finds itself dealing with the consequences of someone else’s gamble. The crown jewel of Britain’s economy is poised to become a key test of the prime minister’s Brexit strategy, and when the UK triggers article 50, major City employers are expected to roll out contingency plans that could lead to them moving parts of their operations outside the UK. Banks, insurance companies and fund managers will be seeking assurances about the type of deal May’s government can secure. Bankers argue much is at stake. The lobby group TheCityUK calculates that financial and related professional services employ more than 7% of the UK workforce, not just in London, and produce nearly 12% of the UK’s total economic output. The City generates a trade surplus of £72bn, which means it sells more services abroad than in the UK. Every day rumours swirl about which bank – usually an American one – intends to shift hundreds, or thousands, of staff abroad in preparation for Brexit. Forecasts for jobs at risk range from about 30,000, by the Brussels-based Bruegel thinktank, and 232,000, by the London Stock Exchange chief, Xavier Rolet. Douglas Flint, the chairman of HSBC – Britain’s biggest bank – has likened the situation in the City to a Jenga tower that could collapse at any time if too many bricks are removed. “That whole infrastructure of professional services, risk sharing, risk adjustment, clearing and settlement is an ecosystem and it all benefits from all the other pieces being there,” Flint said. The UK’s membership of the EU helped create this cluster of related businesses. International banks, fund managers and big brokerage firms based themselves in London and conducted business across the EU by using “passporting” rights attached to membership of the single market. Passporting allows a banker employed by a UK-based operation of a US, Asian or other non-EU bank to tout for business from companies and individuals inside the single market. More than 8,000 EU firms hold a passport that allows them to operate in the UK and 5,500 have been issued with passports by UK regulators to operate in the EU. Leaving the EU means this passport expires – raising questions about what future laws will be used on contracts for major transactions such as complex derivatives. Sir Howard Davies, the chairman of Royal Bank of Scotland, said the amalgamation of people and activities in London by international banks is impressive when compared with their other foreign outposts. “It’s remarkable if you look at the big investment banks – it’s thousands and thousands [of jobs] here and tens in other places,” he said. It means that London conducts three-quarters of all European trading in foreign exchange and interest rates and half of all fund management activities. Major European companies ask investors in London to buy their debt, so they can use that money to finance their activities. The debate about how those European companies will be affected if the City loses its dominance is the “current battleground”, according to Davies. And the Association for Financial Markets in Europe (AFME) is trying to quantify it, measuring how Brexit will affect the ability of companies in the EU27 countries to raise financing. The battleground certainly has shifted since the early days after the referendum, when the result created what some bankers have described as a sense of mourning across City deals where EU nationals sit alongside American, Swiss and Asian bankers. At first the City clamoured for unfettered access to the single market. But even before May made clear this was not going to be possible, the mood had changed. The industry is starting to coalesce around ideas known as “mutual recognition” and “expanded equivalence”, which largely achieve the same goal – the ability to operate seamlessly in the UK and EU – but give May the control over UK borders that she seeks. “The extent to which we get equivalence will depend on the extent to which we can bring home the argument that not agreeing a reasonable degree of equivalence between London and the rest of the EU is actually going to be disruptive to Europe’s capital markets and damage the ability of European companies to raise funds,” said Davies. In practice, major City firms do not have the time to wait for the outcome of the negotiations. The Bank of England has made it clear it is asking banks to prepare for hard Brexit. A report for AFME by accountants PricewaterhouseCoopers said banks were having to plan for a hard Brexit but also said the banks it had interviewed had committed to a plan of action. The two years to negotiate Britain’s EU exit are not enough, major banks argue, to make the changes they need to set up new operations, apply for regulatory licences and hire new staff. “As our latest report from PwC shows, we’re going to get into a situation where for some organisations there is not a lot of time to get the answers [they] need,” an AFME official said. Few City firms want to go public with their plans – but financial centres inside the remaining EU countries, notably Dublin, Paris, Frankfurt and Madrid – are all vying for a slice of the Brexit pie. HSBC is one of the few to have said already that it will shift 1,000 roles to Paris. Swiss Bank UBS has talked about potential centres in Frankfurt and Madrid. Big US banks JP Morgan, Morgan Stanley and Citi are all working on plans. Some bankers fear staff numbers in the UK could be cut in half. Davies is convinced no one really wants to move but concedes that jobs will go – though not on a scale that will “leave empty caverns … [or] rubbish blowing through empty windows” in the heart of the City. However, even a trickle could become a flood if the benefits of banks clustering together in London start to erode. Industry leaders such as Lloyd Blankfein, of Goldman Sachs, have said new hiring could be on hold while foreign investors work out what Brexit means. If May cannot pull a rabbit from the hat in her EU talks, it may be the likes of Goldman that deliver the most visible verdict. Goldman is building a new London HQ near St Paul’s Cathedral – which is expected to have a doctor, dentist and dry-cleaner’s so employees never have to leave the office. But how many will set foot in the building when it is finished in 2019? It can hold 8,000 people – more than the 6,000 currently on Goldman’s London payroll. If that payroll shrinks, fears will grow that the building could symbolise the first of many white elephants in a new menagerie. Brexit banking job losses HSBC 1,000 roles confirmed to Paris – half of them returning French nationals.Goldman Sachs 3,000 roles rumoured to be going, some to Frankfurt.JP Morgan 4,000 roles could go, the bank has warned.UBS 1,000 of 5,000 jobs will go to Frankfurt or Madrid, according to head of UBS’s investment bank.Morgan Stanley 1,000 roles rumoured to be under threat. |