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The end of the 'Wimbledon effect'?

Wimbledon (the tennis tournament, not the suburb), like the City of London, attracts the world’s top talent, very little of which is home-grown. But how stable will this effect be in a post-Brexit reality? And can we have some certainties about how it’s going to work, please?

Growing a world class financial sector isn’t easy, but London has managed it twice. But is Brexit a disruption too far?  

Nobody knows for sure what makes a successful hub for finance. Partly it’s the people, partly the place, the language, the culture, the regulation, the taxes, the connections.

London was the finance hub for the whole world before the First World War, then came a gradual decline into parochial domestic business. Following the development of the Eurobond market from the mid-1960s, and much more importantly, Big Bang (the deregulation of the London Stock Exchange) in 1986, it rose again as the dominant centre in EMEA. Neither development was driven primarily by access to the EEC, the predecessor of the European Union.

When US banks came to London and pounced on the blue-blooded “brokers” and “jobbers” working on the London Stock Exchange, the City barely handled European business, relying, instead, on trading Gilts and domestic stocks with bid-offers you could drive a bus through.

Nearly a decade later, when Deutsche Bank’s purchase of Morgan Grenfell fired the starting gun on commercial bank purchases of the UK’s merchant banks, London was already much more international in outlook. Deregulation had lit a fire under the UK markets, while the English language and English legal system helped it burn.

Now, however, London is far more reliant on the European Union, because all areas of finance are far more regulated than in the freewheeling 1980s. Just in the last five years, benchmarks, fixed income research, derivatives trading and clearing, leveraged lending, settlement, and fund marketing have seen huge expansions of the regulatory perimeter.

This is what makes it all different this time. As GlobalCapital has argued, deregulating financial markets is a total non-starter, and access to European markets is mediated more than ever by regulatory gatekeepers.

Euro clearing, which the government battled the European Central Bank to keep in London, will more than likely shift to the eurozone, and while the UK can in theory continue to allow euro clearing in London, in practice, it will be treading carefully to preserve whatever remains of its financial services access.

But it’s too early to write London as a financial centre off entirely.

Even if we had worst-case type of Brexit, it would still take time and trouble to move perhaps more than 50,000 jobs out of London. Dublin has a total population of around half a million, and the Irish housing market only turned over 43,000 properties across the whole country last year. It does not have the scale to be the new London.

The City also has a few other advantages up its sleeve, suggesting that the panic is perhaps overdone.

The English language and English law are obvious, permanent advantages. The latter leans heavily on contractual terms, rather than judicial notions of “right”, while the presiding judges have decades of experience in wholesale financing and commercial work.

That supports an ecosystem of lawyers and professional services employees who are no less crucial than the banks, brokers and investors to the smooth functioning of capital markets, and their location in London.

And then there’s the reinsurance market, ship broking, metals trading, gold, fintech, venture capital, and so on and so on. There’s access to the Reg S dollar market, Asia, Australia and there might, eventually, be India. Not all of this is a Brexiteer’s delusional fantasy. These industries feed off and into the European banking and investment industries, suggesting that the City is not looking at game, set and match just yet.

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