Implications of triggering Article 50 on London’s banking sector

Jan Hoffmeister, Drooms: there are many incentives for banks to stay in London post-Brexit

Article 50, triggered just nine months after Brexit was officially announced, will give the UK exactly two years to strike a deal with the EU concerning its departure from the economic and trading bloc.

Many financial institutions are understandably on the edge of their seats waiting to see what trade agreement the UK will emerge with following tough negotiations in the coming weeks. Others are less inclined to wait it out and may execute their own contingency plans before any results of the talks become clear.

The impending snap election called by Theresa May to strengthen her hand in Westminster has merely served to muddy the waters. Such uncertainty has been reflected in the M&A sector particularly where activity has become increasingly volatile since June 2016.

So what will be the impact of the referendum on the square mile? Will it cease to be the major financial hub this side of the Atlantic?

The short answer is we don’t know. Theresa May’s letter to Donald Tusk formally notifying the European Council of the UK’s decision to leave the EU on 29 March 2017 reemphasised that Britain would not be seeking continued membership to the single market.

With current passporting privileges at risk of extinction and with that certain banks’ right to sell services freely across the EU, some, including UBS, HSBC, Goldman Sachs, JP Morgan and Citigroup have indicated their intentions to move staff handling European instruments elsewhere.

Current figures released by US financial firms suggest that the number of staff affected could be in the thousands. According to Benoit de Juvigny, Secretary General of the AMF, there have been a number of enquiries by consultants and lawyers regarding Brexit and a potential move of members of the banking sector in London to Paris. Other locations of interest include Dublin, Frankfurt and New York.

Even in the worst case scenario however, where the outcome of the looming general election supports a hard Brexit, the argument still stands that the moving of a few jobs, which till now is mainly speculative, does not necessarily imply the upheaval of institutions in their entirety.

On the contrary, there are many incentives for banks to stay in London even if certain jobs do move to rival cities. HSBC has already confirmed, following the UK’s decision to leave the EU, that its global headquarters would remain in London and the likes of Deutsche Bank have shown their continued commitment to the square mile by beginning negotiations to relocate staff to offices in Moorgate by 2023.

There are a number of reasons why investing outside of London post-Brexit is daunting for many financial institutions. For one, the sheer notion of having to disturb current practices and allocate time and resources to an internal restructure is highly inconvenient. The movement of staff is not only an effort in the short term but in the long term too, especially when the prospective location is unfamiliar territory and regulatory and political systems are unchartered waters.

The City is known for its rule of law and for its regulators that enforce such laws. The UK’s revered legal framework inspires confidence in the market place by advocating a certain way of doing business. The costs involved not only in relocating staff to another city but also incurred due to the loss of favorable conditions in which to carry out business is also a contentious issue, especially when the benefits may not amount to anything more than a very small and potentially ineffective job market.

There is the added concern that rival cities are not adapted to support a move, whatever the scale. London is unique in that it not only conducts business in English and has a large talent pool but is extremely well located with a global reach in terms of transport links to the rest of the world. The time zone is particularly attractive for doing business internationally too.

From an EU perspective it has been argued that the overhead and financial instability incurred by the remaining 27 member states in absorbing business is being greatly underestimated. That is of course if banks decide to have continued access to European financial markets from the continent. New York could be significantly more attractive for US banks in particular.

While everyone is attempting to predict what will happen as a result of Brexit, for which no answer can be provided as yet, the “keep calm and carry on” slogan ought to resonate. For one thing, we are a lot more interconnected and interdependent then we realise and there is a common interest in each side having access to each other’s markets.

Where access to the single market and the option of a customs union remains unlikely, a regulatory equivalent system should be implemented. In the meantime, it is crucial that the transition period is handled correctly to avoid an exodus generated by unnecessary panic. This is by no means an easy feat and to state otherwise is delusional.

By Jan Hoffmeister, managing director, Drooms

Drooms, Europe’s leading virtual data room provider, has worked in the corporate finance and M&A sector for over 15 years facilitating the due diligence process for a number clients including the likes of J.P Morgan and UBS.

The Drooms NXG software features the most unique Q&A on the market.