It is unlikely that there will be much support for Brexit among the 3.4% of the UK’s workforce who depend directly on the financial services sector for their livelihood.
By no means are all of these based in London, and even fewer work within the confines of the Square Mile of the capital somewhat archaically known as the City.
According to TheCityUK, the cheerleader for Britain’s financial services sector, about two-thirds of those employed in the industry and related professional services are based outside the M25 motorway which encircles the capital.
Regardless of where in the UK they are located, few in the British financial industry will relish June’s referendum on EU membership.
Nicky Edwards, director of policy and public affairs at TheCityUK, says that its recent survey on attitudes towards Britain’s membership of the EU found that 95% of its members believed access to the single market was important to their business. Unsurprisingly, 84% of respondents to the same poll indicated that they wanted Britain to remain in the UK.
This chimes with similar polls from other organisations. The London-based Centre for the Study of Financial Innovation (CSFI) describes the findings of its survey on attitudes towards Brexit as “pretty overwhelming”. Nearly three-quarters of respondents indicated they would “definitely” (49%) or “probably” (24%) vote to stay in the EU. Intriguingly, however, these respondents want to remain in the EU even though 42% feel that the European Commission is “hostile” to City interests.
TheCityUK’s members share the view that while they would prefer to stay in the EU, they want a number of its shortcomings to be addressed. “We believe the City’s position will be strengthened by reform, which is why we have drawn up our own reform proposals,” says Edwards. TheCityUK’s compendious blueprint for change, published in June 2015, outlines 25 proposed reforms.
Edwards says the central pillar of these proposals is the completion of a single capital and digital market that would work to the benefit of all 500m members of the EU’s population. TheCityUK sums up its proposed package of reforms by saying that it wants to see “Europe where necessary, national where possible”.
Beyond surveys from organisations such as TheCityUK and CSFI, a series of recent statements has left no doubt about which side of the EU fence influential players such as the Bank of England and the heavyweight investment banks sit on. Mark Carney, governor of the Bank of England, has warned that Brexit would pose a risk to Britain’s financial stability and lead banks to think twice about
keeping their European headquarters in London.
Carney’s remarks earned him a slap on the wrists from the Leave campaign, but much of his evidence to the Commons Treasury Committee simply repeated what many of the international banks operating in London had already said. HSBC has indicated it would be likely to relocate a substantial chunk of its workforce from London to Paris in the event of a Leave vote. John McFarlane, chairman of Barclays, has said London’s position would be significantly worse, and Morgan Stanley’s international chief executive, Colm Kelleher, has warned of a “significant backlash” against London as a financial centre if the UK were to drop out of the EU. JP Morgan, Citi and Goldman Sachs have all made similarly ominous warnings about the likely consequences of a Leave vote in the forthcoming referendum.
How helpful these warnings may be to the Britain Stronger in Europe campaign is open to debate, given that there are plenty of voters who would still be delighted to see the country’s banking industry brought down a peg or two. Those still bent on bashing the banks should be careful what they wish for. After all, the UK’s financial services sector does a very good job of lining the taxman’s coffers. According to data published by the City of London Corporation and PwC, the financial services industry contributed £66.5bn in taxes to the UK exchequer in 2014/15, which represents 11% of total UK government tax receipts.
More broadly, by virtually any measure the financial services sector in Britain is a classic case of an industry that isn’t broken and therefore doesn’t need fixing. If anything, recent indications suggest that it is even strengthening its position. In the Z/Yen September 2015 survey of international financial centres, London regained the top spot it had lost to New York in March 2014.
It is easy to see why. According to the latest numbers put together by TheCityUK, Britain has an international market share of 49% in interest rate OTC derivatives, 41% in foreign exchange turnover, 18% in hedge fund assets, 17% in cross-border lending, 8% in fund management and 7% in exchange-traded derivatives. In all these areas, France and Germany each have market shares in single digits.
Views differ markedly on how much these market shares may be diminished over the longer term if Britain wakes up on June 24 to find itself slipping out of the EU. They also differ markedly within individual sub-sectors of the broader financial services space.
Take the asset management industry, which some analysts say will be vulnerable if the UK leaves the EU. A recent Morgan Stanley report, for example, says that the chances of a friendly agreement giving the UK full access to the single market in the event of a Brexit are low. It adds that the EU may be reluctant to give the UK preferential treatment, “given financial stability concerns around prospects for an ‘offshore’ EU financial centre”. The consequence, warns the Morgan Stanley analysis, is that the asset management industry could face “higher costs, lower operating margins and lower valuation multiples”.
Chris Fisher, CEO of Multrees Investor Services, is more relaxed about the prospects for an industry which generates about 1% of Britain’s GDP and directly employs more than 32,000 people, according to data published by the government. “Our focus is on the asset management sector, which feeds into much of the UK’s investment banking and brokerage business, and we see London going from strength to strength,” he says. “The most recent statistics show that assets under management (AUM) grew by 8% to 10% between 2014 and 2015, with much of the inflows coming from overseas, and I don’t see this being slowed down in the event of a Brexit.
“Our concern, which is shared by our clients, is the short-term volatility that will inevitably be created by uncertainty surrounding the referendum. My view is that as long as each camp marks out a very clear pathway for what would happen after the referendum, there will be no long-term negative impact on the UK’s asset management industry.”
No room for complacency
But none of this is to suggest that Britain in general and London in particular can afford any room for complacency in protecting its status as the nerve centre of the global financial services industry. While the market share figures published by TheCityUK look impressive enough, a recent analysis published by the British Bankers’ Association (BBA) and Oliver Wyman is rather less upbeat. The BBA study looks predominantly at the narrower market for banking — as opposed to broader financial services — and its findings are unsettling.
The BBA/Oliver Wyman report identifies several trends which were eroding the competitiveness of wholesale banking in the UK long before the word ‘Brexit’ crept into the public lexicon. Innovation in technology is making international wholesale banking more portable. New financial centres are piggybacking off the growth of emerging markets. The post-crisis reform agenda has reduced returns in wholesale banking globally.
At the same time, says the BBA/Oliver Wyman assessment, UK-specific policy and regulatory decisions have also begun to reduce the attractiveness of the UK as a location for international banking. These are serious concerns, given that of the £6tr of assets in the UK wholesale banking sector (in 2014), about £4.5tr were international.
There is evidence suggesting that these threats are already gnawing away at the edges of the UK’s banking sector. According to the BBA/Oliver Wyman numbers, since 2011 banking assets in the UK have shrunk by 12% (5% in wholesale), while they have risen by 12% in the US, 34% in Hong Kong and 24% in Singapore. “Over the same period,” says the report, “employment in the UK banking sector has fallen by 8%. In activities linked to capital formation like cross-border lending and initial public offerings (IPOs)… the market share of the UK is static or falling. Additionally, in a recent survey of BBA members, two-thirds of respondents stated they had moved activity and jobs away from the UK since 2010.”
These shifts in market share are noteworthy because conventional wisdom has assumed that if there is business to be lost by Britain, it will be picked up by European centres such as Frankfurt and Paris. Both have been covetously eyeing the success of the City for years, but neither has won nearly as much of London’s market share as they had hoped. In the latest Z/Yen survey of international financial centres, Frankfurt ranked a modest 14, Paris an embarrassing 37.
In some respects, these European centres have fallen even further behind London. France’s economy minister said recently that Paris was ready to roll out the red carpet for London’s bankers if a Brexit turns out to be a precursor to a mass exodus of professionals from the UK’s financial services sector. But if a queue of bankers were to form at the Eurostar terminal at St Pancras in the aftermath of a Leave vote, many would be likely to have French accents. As Sir Roger Gifford, Lord Mayor of London from 2012 to 2013, recently remarked in a roundtable: “Aren’t we the second largest Parisian borough? We have 800,000 French here.”
Besides, rather like the banker-bashers at home, perhaps Britain’s competitors in Europe should be careful about indulging in too much schadenfreude if the UK were to leave the EU. “Brexit may impact on the location, liquidity and cost of financial services in Europe if it undermines London’s competitive position,” notes a report on the likely consequences of Brexit published by Global Counsel. “This would be costly for businesses and households across Europe. Most large European banks have major operations in London which would be costly to relocate. Only a small number of financial centres elsewhere may benefit.”
This view is supported by TheCityUK’s research. “We don’t see Brexit as a zero sum game in which other European financial centres would pick up market share if Britain left the EU,” says Edwards. “Our research suggests that any business lost by London because of restricted access to the single market is likely to migrate to Asia rather than Europe. So those who hope that Frankfurt or Paris would gain from the City not being part of the EU are likely to be disappointed.”
At Multrees, Fisher agrees. “Although it manages primarily domestic assets, we see our main competitor as New York. The would-be European competitors for London’s global crown, such as Frankfurt and Paris, still lack the cultural diaspora and other benefits and attractions that it has,”
The potential of Asia
Its traditional areas of strength tell only part of the story of London’s success. Perhaps more important has been the dynamism with which it has responded to geopolitical change and product development and the opportunities this is creating outside Europe — most notably in the largest emerging economies of Asia.
London, says Edwards at TheCityUK, would be better equipped to pursue these opportunities as part of a strong single market than if the UK were to plough its own furrow outside the EU. “We believe that not just the UK, but the whole of the EU, should be much more outward-looking and focus on being competitive globally,” says Edwards. “In competing for business internationally, we would prefer not to have the distraction of having to negotiate bilateral agreements with overseas partners who have made it clear that they would prefer to deal with the EU as a single entity.”
One recent example has been the resources London has channelled into building bridges to the fast-growing Indian capital market. In October 2014, a new financial partnership was launched between London and Mumbai. This was followed soon afterwards by the launch of a Masala bond by the International Finance Corporation (IFC), which was the first issue of rupee bonds listed on the London Stock Exchange. As the IFC announced at the time, London was chosen “to leverage the city’s standing as a premier financial centre”.
China has also been identified as a key growth area for the UK’s financial services sector, with London playing a pivotal role in the internationalisation of the renminbi. The most recent analysis of trading patterns published by the City of London Corporation is dated June 2015, but the trends identified in this report are clear enough. Foremost among these was the very strong growth in RMB FX trading volumes, which skyrocketed in 2014 by 143% over 2013 and by nearly six times the volumes reported in the first survey published in 2011.
In spite of recent volatility, the report notes that global RMB business continues to develop briskly, both in terms of volume and the breadth of products and services denominated in the currency. “UK growth matches… this global trend and we expect London will maintain its position as a leading centre for RMB business for the foreseeable future, bringing with it even more opportunity within what remains a nascent but hugely exciting emerging financial market,” notes the City of London Corporation report.
Given London’s track record, it is easy to underestimate the importance of its achievement in the RMB market. But if such things were driven solely — or even largely — by trading patterns, Frankfurt would stand head and shoulders above the rest as Europe’s hub for RMB business. “The UK’s economic growth has been infused with a strong entrepreneurial spirit in the services sector,” says Rongrong Huo, global head of China and RMB business development at HSBC in London. “This will hopefully continue to drive the relationship between the City of London and China, despite Germany and France being considered China’s main trading partners in Europe.”
As Huo says, the relationships that the financial services of Britain and China are building stretch way beyond the RMB business. “Everybody talks about the internationalisation of the RMB which is of course very significant both for China and the UK, but we see much wider and strategic growth opportunities being built around the China
globalising agenda,” she says. “The UK continues to lead with big themes such as the green finance initiatives co-chaired by the PBOC and the Bank of England, which is also incredibly important for the development and transformation of the global capital market.”
As well as exploring new opportunities in areas ranging from Chinese bond issuance to sustainable financing solutions, London has also been remarkably successful at confounding or fighting off the various challenges that have been made to its pre-eminence. The most obvious of these was the launch of the single European currency and the dire warnings that were issued at the time suggesting that the UK’s exclusion from the eurozone would herald its demise as a financial centre.
Britain has also enjoyed considerable success in contesting several EU regulatory proposals that are detrimental to its financial services industry. Recent examples have ranged from the EU’s proposed restriction on bonuses for smaller financial services companies to the financial transactions tax enthusiastically promoted by France and
a handful of other eurozone
“Fortunately the small group of member states that were pursuing the tax are no longer doing so with much enthusiasm or likelihood of success,” says Edwards at TheCityUK.
While there may be a higher likelihood of success of a Brexit, past experience suggests that if the vote goes against the financial services sector’s wishes, the City will not give up its position on the world’s banking stage without a very big fight.