Nearly three quarters of British bankers believe that London will remain Europe’s financial powerhouse in five years’ time, countering recent concerns that UK’s capital city will lose its top spot to rivals such as Paris, Amsterdam, Zurich or Frankfurt.
For decades the UK, London in particular, serves as the heart of Europe’s financial services industry. Today the sector today generates between £190 to £205 billion pounds of revenue each year and employs about 1.1 million people, and, as a result, the industry accounts for more than 20% of UK’s total services exports. Yet following Britain’s decision to opt out of the European Union, several reports have emerged which warn for Brexit’s impact on the competitive position of the industry.
According to a report by Oliver Wyman, commissioned by the finance industry group TheCityUK, Britain’s financial industry could lose up to £38 billion pounds in revenue in a so-called ‘hard Brexit’, a scenario in which the UK would give away access to the single market. If banks, insurers and other financial services players lose the right to freely sell their services across Europe, then up to 75,000 jobs could disappear – losses which come on top of the large reorganisation programmes that are currently flowing through the City’s veins. The government could miss out on £10 billion in tax revenue per annum, the report by the consulting firm said.
Another report, by PwC, highlighted that UK’s vote to leave the EU would mean that London would lose its status as Europe’s most economically attractive financial services capital, with Dublin in the driving seat to take its top spot. Other predators looming on the horizon to snap a share include Paris, Amsterdam, Frankfurt, Munich, and Zurich.
A new analysis, conducted by Synechron Business Consulting in conjunction with research agency TABB Group among 80 UK-based financial services executives, shows however that there is a (considerable) disparity between what external experts think and what bankers themselves believe. Despite the fact that 78% of executives surveyed agree that Brexit will have a negative impact on UK financial markets, 72% said they believe London will still be the financial centre of Europe in five years’ time. In other words, many consider that the implications won’t be as significant in the long-term as cautioned by others, and when it comes to dealing with the impact, they believe London’s strong position in the financial services space will enable the city to rebuff pressures.
“The study found that the majority of British bankers believe that London will remain the financial centre of Europe, painting a very hopeful picture of the future”, says Tim Cuddeford, Managing Director at Synechron Business Consulting.
One reason that may deter British banks from relocating to another European financial centre is the hefty price tag that comes with it. According to Synechron’s analysis, the average relocation cost per employee amounts to roughly £50,000 per year.
Preparing for Brexit
The research further found that the majority of banks are not willing to wait and see what agreement the UK government agrees with the European Union and how the industry will deal with the uncertainties. 55% of the executives said that their bank has set up ‘Brexit Steering Committees’ to prepare for life outside the EU, a number which mirrors a claim made recently by the British Bankers Association (BBA), which said that many large and small banks are considering their options outside of the UK.
“Banks are no longer waiting for the Government to trigger Article 50 and have begun setting up Steering Committees to plan for life outside the European Union, with some already considering relocating staff to other cities around Europe”, says Cuddeford.
He adds that whilst Brexit poses an unforeseen challenge for financial institutions, the prospect of rising compliance costs appear inevitable, contrasting a popular view that Brexit would reduce red-tape for financial institutions. In the research, 56% of senior British capital markets executives fear that compliance costs will increase following Britain’s decision to leave the European Union, with not one executive expecting regulatory costs to decrease.
Executives have mixed views on how the UK should best proceed. 19% of respondents believe that the UK should pursue the ‘Norway option’ and negotiate to remain part of the European Economic Area, whilst 18% believe the UK should follow the ‘Swiss model’ and negotiate bilateral treaties. “Whether London pursues the Norway option or the Swiss model will be a nod to what regime the financial centre views as a better model. And, perhaps most importantly, the rift between the UK and continental Europe is likely to widen”, comments Joost Loves, a Managing Director at Synechron Business Consulting based out of Amsterdam.
Impact on Europe
Interestingly, 8 out of 10 executives believe the EU will also be negatively affected by Brexit. This could, in part, be because 51% of managers believe that Britain is in a position to negotiate a bespoke trading relationship with the EU that is tailored to the interests of the UK. Loves: “While the UK focuses on the impact of Brexit on London, undoubtedly, Brexit will also have a rippling impact on continental Europe as well.”