The Brexit dividend – a boost for global cities?

The advantages of attracting companies in the wake of the Brexit decision are clear. David Sapsted looks at some key locations bidding for a piece of the action as well as the views of business leaders and politicians.

The Brexit dividend
Politicians and cities around the world have been quick to see the advantages of attracting companies planning to leave the UK in the wake of the Brexit decision. David Sapsted looks at some of the key locations bidding for a piece of the action, and canvasses the views of business leaders and politicians.The vultures, as one City financier put it, are circling. Then, he added with a smile, "They might be disappointed, though, as we really don’t know yet how much of a carcass will be available to peck at."He was referring to the determined efforts of cities across the world to pick up business – and to transfer skilled personnel – from London’s financial hub in the wake of the UK’s referendum decision to leave the European Union. Not without reason, a widespread conviction exists that, if Brexit is accompanied by a loss of passporting rights for Britain’s financial sector, banks and other financial and legal services will have little option but to relocate some offices and staff to other nations.This, in turn, has sparked a 'beauty contest' among cities, primarily but not exclusively in Europe, as they try to lure people and activities away from London. Several international banks are already looking at moving staff in the event of the disappearance of passporting, which gives UK-based institutions the right to trade freely across Europe.As Anthony Browne, chief executive of the British Bankers' Association, has warned, "Hands are quivering over the relocate button."

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Mr Browne wrote in the Observer this autumn, "Banking is probably more affected by Brexit than any other sector of the economy, both in the degree of impact and the scale of the implications. It is the UK’s biggest export industry by far and is more internationally mobile than most. But it also gets its rules and legal rights to serve its customers cross-border from the EU."Banks might hope for the best but have to plan for the worst. Most international banks now have project teams working out which operations they need to move to ensure they can continue serving customers, the date by which this must happen, and how best to do it."

European cities competing

The stakes are high. Latest research from lobby group TheCityUK puts the country’s trade surplus in financial services at a record high of £63.4 billion – a surplus that has risen £185 million year on year and is greater than that of the US, Switzerland, Luxembourg and Singapore combined. More international banks trade in London than anywhere else in the world, with the City accounting for the largest share of international bank lending globally and 37 per cent of worldwide foreign exchange transactions.But TheCityUK has suggested that a ‘hard’ Brexit and loss of passporting rights could cost the City of London up to 75,000 jobs. So it is little wonder the vultures are circling, with Dublin at, or near, the top of many bankers’ lists – and not solely because of its English-language advantage. Within hours of the Brexit vote in June’s referendum, Martin Shanahan, head of Ireland’s Industrial Development Authority, had sent 1,200 letters to UK companies outlining Ireland’s role as a gateway to Europe.Ireland has already given notice that it wants to be the new home of the European Banking Authority (EBA), the pan-European banking regulator currently based in London. The Irish government has also approved a bid to relocate the European Medicines Agency – again, currently based in the UK – to Dublin."While the UK continues to be a full member of the EU until the negotiations for their exit have been completed, preparations must be made for eventualities such as the relocation of certain European agencies like the European Banking Authority," said Finance Minister Michael Noonan."Ireland has a significant financial services sector, efficient transport links to other European capitals, and the capacity to absorb the European Banking Authority’s relocation to Ireland."

London to remain global centre

But Dublin is facing stiff competition from the likes of Amsterdam, Frankfurt, Milan and Paris. Luxembourg, too, is eyeing post-Brexit opportunities, with Nicholas Mackel, the nation’s head of financial development, revealing that a string of overseas banks and fund managers had inquired about moving staff from London since the referendum.Mr Mackel believes that, at most, 30,000 staff currently employed in London will eventually move, with the majority redeployed to Frankfurt, Dublin and Luxembourg. "They are not looking to move their entire European teams from London; they just want to open a small unit in Luxembourg as well," he said."But London is the major global financial centre and will remain the major global financial centre. You built London over decades, you have the infrastructure, the depth of expertise that is unmatched."It is a view that appears to be shared in Milan, where Select Milano, an independent group of financiers and lawyers endorsed by the Italian government, is campaigning for a postBrexit financial services centre shared between London and the Italian city. Bepi Pezzulli, the organisation’s chief executive, also says a plan is being drawn up to use Dublin as a satellite because the Irish legal system is closest to the principles of English law."I don’t think destroying or fragmenting the City of London is a good way forward," he says. "Destroying a cluster is not good. We should instead enlarge the cluster and make London and Milan the head of a new cluster."Mr Pezzulli added that he had particularly in mind euro-denominated clearing, where London is the centre of a €570 billion-a-year trade in financial products in Europe’s single currency.

Paris, Frankfurt and the US

Cities with even greater ambitions are Frankfurt and Paris, the latter unveiling in November a campaign to roll out what Prime Minister Manuel Valls called “the tricolour carpet” to attract London businesses. The Paris plan includes a service to help companies deal with French bureaucracy and find offices for relocated staff and schools for their children.Ross McInnes, chairman of French engine-maker Safran, has been named ‘ambassador’ for the Parisian drive aimed at attracting up to 30,000 jobs from London. "No one is suggesting that someone is going to switch out the lights [in the City] but, clearly, there is going to be a change in the balance of where activities are going to be carried out," he says, even though France’s labour and tax laws argue against Paris in many people’s opinion.Germany, on the other hand, is considering amending its labour laws to make Frankfurt a more attractive hub for banks looking to move staff out of London after Brexit, according to the Financial Times. The newspaper reported in the autumn that an upper salary limit of €100,000 or €150,000 on employee protections was being considered, which would make provisions for such things as redundancies less generous.The proposal was reportedly floated when a German delegation promoting Frankfurt as a financial centre toured London recently. But while Frankfurt has obvious appeal as a post-Brexit destination – it is, after all, home to the European Central Bank and many other financial institutions – the city’s tough building codes and a shortage of large office space could act as a disincentive.Some leading American banks have indicated that, if passporting is lost to London, they are more likely to relocate core operations to New York than elsewhere in Europe. James Gorman, CEO of Morgan Stanley, said that, although the bank was looking at whether it needed a new HQ in the Eurozone, he thought "the big winner is going to be New York".Mr Gorman’s opposite number at JPMorgan Chase, Jamie Dimon, told an Italian newspaper that, if passporting rights were lost, the bank would "have to relocate a few thousand people to other offices in the Eurozone, though the majority would stay in the UK".

Madrid, Amsterdam and beyond Europe

Nevertheless, some cities see possibilities opening up in niche markets should London’s standing decline. Madrid, for example, is highlighting Spanish links to Latin America in its charm offensive. It is also emphasising its cheaper real-estate and living costs than rivals such as Paris.Daniel Lacalle, who heads the Madrid marketing effort and is chief investment officer at investment advisory firm Tressis Gestion, said, "There aren’t many cities with such a good mix of costs and quality of life. We are a centre of investment, attracting capital for the European Union as well as Latin America. I don’t think the City [of London] will disappear by any means: what I think is that it will be an opportunity for companies to spread out their hubs."Without adopting a high profile, Amsterdam has attracted the attention of several banks, some of which have already put "previously vacant swathes of modern office space under option", according to Mike Prew, an analyst at broker the Jefferies Group.James Rushworth, from Standard Life, adds, "There are a number of reasons why Amsterdam, in particular, could do well. It has that historic global trading outlook like London, good connectivity, it is attractive as a place to live, it has goodquality transport, it has a well-educated population, and English is so well spoken."However, overtures are also coming from further afield, with both Singapore and Hong Kong keen to attract talent from London, particularly in the field of financial technology, or FinTech."First thing after Brexit happened, we talked about talent – talent coming out of the UK," Sopnendu Mohanty, chief FinTech officer at the Monetary Authority of Singapore, admitted in November at Singapore’s first FinTech festival. "I agree they have a huge pool of talent, and it’s good to have something like that so we can take some talent out."

The future of passporting

The question, though, is how much of this talent will be ready and willing to move. So much of that hinges on the future of passporting in the Brexit negotiations, and the financial sector has remained stubbornly unimpressed by the government’s refusal so far to spell out what its negotiating position will be on the issue, beyond an assurance from Chancellor of the Exchequer Philip Hammond that top bankers will retain rights of free movement.Mark Garnier, the International Trade Minister, accepted in a recent interview that passporting could well disappear, and that an alternative system of regulatory ‘equivalence’ would probably not be “good enough” because it would be controlled out of Brussels."If we can create a special hybrid version of that, with a better version of equivalence or a different version of passporting, then that’s what we will try to achieve," said Mr Garnier. "What we are not trying to do is fit into an existing box. We are trying to create a new model." Asked if this meant that passporting was likely to end and be replaced by something else, he replied, "Exactly."Little wonder the vultures are circling, even if they can’t quite see the carcass yet.

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