On a rainy June morning in Paris, five dozen men and women gathered in a basement in La Défense, the city’s financial district. Over bitter coffee and fluffy croissants, the great and the good of French politics, business and finance had gathered to plot a heist.
With two weeks to go before the Brexit vote, they wanted to be ready with a sales pitch to lure the international financial groups based in London, should Britain vote to leave the EU. Now, they reasoned, any company with pan-European aspirations would be compelled to move jobs, business lines, even headquarters out of London.
At the time hardly anyone seemed to believe that the UK electorate would really vote to leave. But that didn’t stop the Parisien elite. Jean-Louis Missika, a deputy mayor of Paris, promised he would be “rolling out the red carpet” to bankers if Brexit happened. Gérard Mestrallet, head of the Paris Europlace lobby group, says this was “the moment” for Paris as a financial centre.
It is a dramatic turning of the tables. Four years ago, Boris Johnson, the then London mayor turned Brexit frontman, who said on Thursday he would not enter the race to be next Conservative prime minister, was goading Paris for the “tyranny and terror” of its rich-soaking tax policies and inviting French bankers to escape to London. “Vous êtes tous bienvenus,” he boomed.
This time it is Paris that is appealing to bankers in London with a “Welcome to Europe” slogan.
The French charm offensive has been notably aggressive, but they are not alone. Frankfurt and Dublin — and a long list of others from Luxembourg to Warsaw — are now clamouring to appeal to the banks, insurance companies and asset managers for whom using the City of London as a single European hub may no longer be sensible. And where those financial services groups go, a whole host of ancillary roles — in law, accountancy, consultancy and the rest — will follow. Tens of thousands of jobs, out of nearly half a million in the City, could be at risk, financiers estimate.
The sales pitch is simple. If the UK is outside the EU, financial services companies will be stripped of the “passporting” rules that allow them to operate across borders without local licences. Those companies will need instead to think about a new EU base. The City, which has grown and globalised since the Big Bang deregulation reforms 30 years ago, would shrink and deglobalise.
Not everyone buys the argument. Some contend the City has an even brighter future as a centre focused less on Europe — excelling, for example, in offshore renminbi trading and financial technology. In any case, bullish British lawyers reckon that UK negotiators will be able to strike a deal to extend passporting. If that proves politically impossible, they point to new rules, under the so-called Mifid II rule book that comes into force in 2018. These should give any non-EU country with “equivalent” financial rules access to the single market on level terms.
One snag is the risk of an EU country — like France — sensing a competitive opportunity and seeking to have the rules tweaked to disadvantage the UK.
Even if a good deal is reached, says Simon Gleeson, a lawyer at Clifford Chance who advises many of the big banks, it may be academic. “Banks [will] have to write their contingency plans before they know the [political] situation that will exist in the future.”
In other words, a bank may need to decide to shift chunks of its business to more secure EU locations, regardless of what politicians manage to negotiate.
Paris
For banks and investors, there is likely to be an added impetus to move at least some functions to an EU location if, as expected, the European Central Bank insists that future euro-denominated financial trades are cleared and settled within the EU.
The question, then, is which city will win out?
Paris can claim the prize for boldness. Arnaud de Bresson, managing director of Paris Europlace, says he has already been in talks with half a dozen global banks. “They are shocked about the result, but looking to move people to Paris,” he says.
Promoters of Paris point to several strengths. It has an established financial ecosystem, with five of Europe’s 20 largest banks by assets based there. It has a large funds industry managing €3.6tn, second only to London. It is also one of the world’s great cities, with its wealth of opera houses, theatres and restaurants. Frankfurt cannot compare, they say.
Paris is a corporate capital as well as a financial one, says Mr Mestrallet. “In Paris you find clients, whereas in Frankfurt you find rival banks,” he says, arguing that Paris should be able to attract jobs in asset management, corporate bonds, foreign exchange and clearing. London currently dominates euro-
denominated trading and clearing.
Detractors highlight an uncertain political and fiscal environment, not least the possibility of a French referendum on EU membership. President François Hollande declared finance his “enemy” in 2012 as he proposed hitting the rich with a 75 per cent tax rate. Foreign banks point to high social charges. A €300,000 salary paid in the UK costs a bank €352,740 a year after all charges, while in France this same salary cost €471,799. Rules introduced in 2008 mean charges do not apply to foreigners for up to five years, but for long-term local staff it is expensive.
Philippe Villin, an outspoken French investment banker and close adviser of former president Nicolas Sarkozy, says Paris will never become a major financial centre as long as corporate and personal taxes are so high. “At this stage, Paris is almost as appealing as Caracas or Havana for big banks and well-paid and wealthy professionals,” he says.
Lobbying groups say the reforms are coming. Ahead of the UK referendum the French government loosened rules for international bond issues. Reformers are also pushing to extend the advantageous tax status for foreigners and add more international schools.
Frankfurt
Frankfurt has played its pitch cooler, but in many ways is a more natural contender to suck business from the City of London. “I think it is certainly possible that we could see around 10,000 jobs move from London to Frankfurt over the next five years,” says Hubertus Väth, from Frankfurt Main Finance, a group that promotes the city as a financial centre. “German, Swiss and US banks are most likely to move.” He says it is “relatively clear” that trading activities will shift to Frankfurt.
Frankfurt’s biggest trump card is the presence of the ECB, which not only sets eurozone monetary policy but now also supervises the bloc’s biggest banks. “You can argue whether it is good to be the capital of regulation, but the ECB has definitely helped boost the city,” says one top German banker.
At the fulcrum of the London-Frankfurt see-saw is the increasingly fragile-looking merger deal between Deutsche Börse and the London Stock Exchange. The headquarters of the group were supposed to be in London — a decision the companies said would transcend the risk of Brexit and strengthen Germany’s access to London’s more vibrant capital market. But German regulators and politicians have made it clear that a London HQ would no longer be politically acceptable. One London-based banker close to the deal said such a stance betrayed the small-minded attitudes in Frankfurt that would stop it becoming a major financial centre.
A broader issue militating against Frankfurt is the relative inflexibility of German labour law, such as how expensive it is to fire staff — a particular concern for US banks. Local groups have suggested to the German labour ministry that it consider setting up a zone in Frankfurt where British rather than German labour law is applied as a way of attracting bankers.
Dublin
Dublin, the other EU financial centre with broad appeal, is portraying itself as a more natural fit with City types.
“Dublin and Ireland are the closest you’re going to get to London and the UK,” says Martin Shanahan, chief executive of IDA Ireland, the inward investment agency, pointing to the English language, common laws and a skilled workforce. Industry leaders say the fact that Dublin already has an established finance industry — it has grown from nothing to employ 30,000 people in 25 years — is one of its key advantages.
Dublin’s biggest selling point may be that it is about 40 per cent cheaper than London for financial services groups, says Kieran Donoghue, head of international financial services at the IDA. Still, he says the scarcity of high-quality homes is “a pinch point”.
Other contenders
Alongside the likes of Paris, Frankfurt and Dublin is a long list of upstart challengers. These include locations that might not be obvious bases for glamorous “front-office” roles, but have nonetheless already drawn large numbers of backroom jobs from the City.
Poland has quietly but rapidly become a big “nearshoring” location. More than 50,000 people are now employed by global banks there. “Nearshoring to Poland is only going to grow even further after Brexit,” says Wojciech Poplawski, who heads Accenture’s service centre operations in Warsaw. “There’s EU access and competitive costs. It’s a no-brainer.”
At the same time, locations outside Europe may also become more appealing. For banks such as Goldman Sachs, JPMorgan Chase or HSBC, lawyers believe Brexit may be the trigger to shift some business to Asia or the US.
For most banks, insurers and asset managers, the response to the rival pitches is unlikely to be straightforward. “It isn’t obvious that you try to replicate London where you have everything in one city,” says one senior UK-based banker. “Everywhere has deficiencies, nowhere is a perfect cluster like London,” says another, describing French labour law as a “disaster”.
Instead, groups are expected to disburse employees around the region, depending on office capacity, existing licences and staff preferences. JPMorgan, for example, has licences in Frankfurt, Luxembourg and Dublin and may upgrade other locations such as Paris to fully fledged operations.
“If we move roles to Europe, we have the option of distributing them across several locations,” says one bank insider. “Not all our competitors do.”
Richard Gnodde, co-head of Goldman Sachs’ international operations, headquartered in London, told a business summit in London this week: “If passporting was totally removed, we would have to adjust our footprint and where people were located.” Goldman has a banking licence for its Frankfurt operation, which includes a small number of staff in securities sales and trading, making the city the most likely destination for any activities moved out of the UK. Goldman is also weighing other options such as Dublin and Amsterdam.
The British banks facing the greatest disruption from any loss of passporting rights are Barclays and HSBC, which have the largest investment banking operations in the City dealing with clients from the continent. Barclays says it has an investment banking licence in Dublin. HSBC executives point to its sizeable trading floors in both Paris and Düsseldorf. Stuart Gulliver, HSBC chief executive, said before the vote that it may move as many as 1,000 jobs to Paris if the Leave campaign won. Among non-banks, fund manager M&G has already decided to launch a new range of funds based in Ireland rather than the UK.
Unless there is rapid political manoeuvring to reverse the process of Brexit, there is one certainty — parts of the City of London’s fabric will soon start to unravel. But amid all the panic and jostling for business, there are those who sit back and say shrinkage may be no bad thing.
A senior banker, who has large operations in London and Paris, takes a big-picture view. “The overconcentration of financial services in London and in the UK has done big societal damage, as the financial crisis demonstrated,” he says. “It may be no bad thing for everyone if there is some redistribution across a number of other financial centres. If 50,000 out of 500,000 jobs move from the City to Paris or Frankfurt, so what?”