The Brexit Diary: What will happen to the City of London after Brexit?

05 July, 2016

The banking and finance industry is much, much more than the City and urgent attention is needed to assure the public understands its contribution.

I’ve heard ‘Vote Leave’ MPs, businessmen, and others say the referendum vote was about sovereignty, immigration, saving money, and new economics among many, many other things and I’m a bit confused as the only thing I was asked to vote on was Remain in or Leave the EU. Clearly, our politicians are grappling with implications of the perhaps too simple or too complex question that was posed to voters.

Indeed, the only written factor I can recall associated with the Vote Leave campaign was the £350 million per week and the NHS tagline on the Vote Leave Bus. This seems to have been disowned by all and sundry near the bus, yet appears as one of the most brilliant election tactic of all time; which employee or patient in the cash-strapped NHS would not have wanted the extra money – there are roughly 1.3 million NHS employees alone who total more than the margin of victory – and of course, think of all the patients! Who knows how they voted, and in the interests of disclosure, I was a Remain supporter and am advocating more uncertainty, yet there were certainly fabrications on both sides that I wish were subject to normal advertising standards or, even better, Financial Conduct Authority disclosure rules! The point is how quickly we jump to interpretations of events, guessing motivations and the future, and particularly all the recent speculation, dare I say marketing and lobbying, about who is going to leave the City of London and for where. I think this is a lot less about the City then it is about Northern England, Northern Ireland, Scotland, and the South Coast then perceived in most reflection to date.

The easy ‘stayers’ are the obvious consumer facing physical businesses; the Piccadilly Circus branch of your bank is not moving to the Champs Elysee, nor will its management or much else related to consumer banking. On the contrary, foreign owned retail banking businesses in the UK with operating areas (i.e. computer systems, data storage) outside the UK might be subject to regulatory scrutiny requiring them to bring those operations into the UK – we’ll wait and see.

The easy ‘leavers’ are EU institutions in the UK such as the European Banking Authority and businesses ultimately tied to European Central Bank support, particularly certain euro currency clearing businesses, but that does mean all euro currency activities will leave. The primary market for trading US dollars for GB pounds is in London. Continental Europe has always had weak capital markets; most EU countries lack large numbers of large public companies, pension funds and other large non-bank savings pools, and many other factors that make markets. These won’t change overnight.

Much of the media and political discussion of recent days has been around the departure of high paying jobs in London – which I would like to call the decision jobs and this is the wrong focus. These are the types of jobs dependent on access to people and quick information that thrive on being in close proximity to other information resources such as competitors, but also the level of infrastructure available, including the advisory or consultancy community and the ease of access to business partners. A company seeking investors can meet more of them in London and despite the rise of the web, many investors still intelligently want to meet the key people who are getting their money.

If these jobs must legally move to within the EU, management contracts will likely be organised such that the real decision jobs remain in the best business environment and that is London.  As a great example, I recall the first banks to escape the City of London and move to Canary Wharf in the 1980s. Only a few miles by a mini-train or a twenty-minute taxi ride, they seemed further away from London than New York for ages. Almost all the Canary Wharf banks opened client and senior management offices in Westminster – it took more than a decade before enough banks, with significant presence, opened in Canary Wharf for there to be a real business ‘buzz’ there and employees didn’t feel they were in a type of purgatory. Banks will be weary to move their movers and shakers to a new ‘EU City’ first and risk losing them to those who remain. However, for the regulatory consultancy and legal community I would expect they will relatively quickly follow the European Banking Authority to its new home and this is a big community of highly skilled and paid staff.

Attention should be focused on the support functions for wholesale banking and investment management and these are a lot of jobs. A few US wholesale banks are amongst the largest private sector employers in Northern Ireland, Manchester, and Dorsett to name just a few localities. Distributing interest rate payments by corporations and receiving them on behalf of investors, producing accounting information and serving as custodians for the fund management industry, to processing vast amounts of financial information. This part of the banking and finance world should move more towards the centre of the UK’s attention. Financial pressures on these businesses over the years has seen significant employment moved from the UK to Dublin, Warsaw, and Budapest, amongst others in the EU, and forced the UK to become more cost effective as the route to retaining and growing jobs. Many of these businesses were once in London but have spread the wealth to Scotland, the North and other regions. Less visible yes, less glamourous maybe, but less important definitely not. The banking and finance industry is much, much more than the City and urgent attention is needed to assure the public understands its contribution.

Dr Peter Hahn is the Henry Grunfeld Professor of Banking at ifs. You can read his entire series on Brexit and it's implications here.