Up until June 23, London was pretty sure of its place in the world. Building on its centuries-old position as a trading hub, it had become increasingly confident as a cultural centre as well as, in recent years, a hotbed of technological innovation.
The referendum vote in favour of Britain’s exit from the EU pulled the rug from beneath the feet of the city — one of the few parts of the UK that had voted definitively (in its case, 60 per cent to 40 per cent) in favour of remaining part of the bloc.
Though it will take years to discover and negotiate exactly what Brexit means in practice, many Londoners felt an instant instability, both personally and professionally — and on two fronts: the uncertain outlook for Britain’s ability to sell unrestricted into the EU-wide single market; and the even bleaker prognosis for so-called freedom of movement.
Perhaps the most tangible short-term impact relates to the right of EU nationals to live and work anywhere in the bloc. Foreigners of almost all nationalities working in the city seem to have been rattled, uncertain whether London’s multicultural atmosphere will be undermined by the protectionist sentiment pervading the Brexit campaign. The issue is a practical one: EU nationals have received no guarantee of their continued right to remain in the UK after Brexit. But the malaise is more profound than that, says Karen Briggs, head of Brexit at professional services firm KPMG, which is working with clients that employ large numbers of non-UK nationals.
“All international workers are worried, not just EU nationals,” she says. “They are questioning whether, without the ability to move freely around the bloc, they want to be based in London.”
The practicalities of employment rules aside, there appears to have been a more general shift in attitudes towards foreigners, too. Within days of the Brexit vote, there was a 57 per cent surge in reports of racist hate crime across the country. While the number of such incidents is still small, the shift in the atmosphere perturbs cosmopolitan Britons and immigrant workers alike. “I’m worried that the UK is turning into a country I don’t want to live in any more,” says one senior British financier in the City of London.
For businesses, though, the bigger concern is about market access and the extent to which exporters will be able to retain anything of the seamless single-market access they currently enjoy. Nowhere is that more crucial than in London, where the dominant financial services industry and the ancillary sectors of law, accountancy and other professional services have ballooned over the past 30 years — in large part because of the capital’s status as Europe’s dominant financial hub.
Why would we continue to devote resources to a continent whose costs and capital requirements will increase when we could invest instead in the US or Asia?
– US banker
Half of the UK’s trade surplus in financial services — worth some £18.5bn in 2014 — comes from exports to the EU. London dominates across multiple niche areas of finance. It does 78 per cent of the EU’s foreign exchange business and 74 per cent of over-the-counter interest rate derivatives; 59 per cent of international insurance premiums are written in London; and 85 per cent of the EU’s hedge fund assets and 64 per cent of private equity assets are managed in the city.
“Our industry is a national asset — one that employs nearly 2.2m people across the UK,” says John McFarlane, chairman of Barclays bank and also of TheCityUK, the financial services lobby group. “A robust and globally competitive industry helps to build a strong and thriving economy.”
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The majority of leading financiers are convinced that Brexit will be a negative for the City of London — shorthand for the capital’s sprawling financial districts. The question is, how negative?
London’s ability to retain its role as a hub for pan-EU financial services will depend in large part on the political deal that is struck in a complex web of bilateral and multilateral negotiations between the UK, the European Commission and the more powerful EU members such as Germany and France.
“Our changing relationship with the EU is critical,” says McFarlane. “The new terms of trade will be of fundamental importance to our industry and to the long-term attractiveness of the UK.”
The early signs were not encouraging. The City was quietly dismayed when the UK’s new prime minister, Theresa May, selected David Davis, a hardline europhobe who has also shown little love for the financial services industry, as her Brexit minister. Brussels quickly responded with what was seen as a provocative tit-for-tat appointment, with former financial services commissioner Michel Barnier made the EU’s man on Brexit. Barnier had led a regulatory charge at the EU, cracking down on banks in the wake of the 2008 financial crisis.
If the two men can bear to look each other in the eye, one of their key challenges will be to establish the degree to which UK-based companies will be allowed to sell their products to the single market, even if the UK pulls up the drawbridge on EU immigrants, as May has suggested she will.
For the City, whose big banks, asset managers and insurers all rely on being able to “passport” their services from London right across the EU, the outcome of those negotiations is all important. If Davis comes away with little or nothing in the way of access, big employers are expected to move those parts of their operations that relate to European sales to alternative EU bases. Dublin, Paris, Frankfurt and Luxembourg have all made early pitches.
No one expects the City to be decimated overnight. But there will almost certainly be an erosion of activity and staff — and not only to rival European centres. “We will be looking at our global resource allocation,” says one senior US investment banker based in London. “Why would we continue to devote resources to a continent whose costs and capital requirements will increase and whose economy is weak, when we could invest instead in the US or Asia?”
Nonetheless, there are plenty of voices arguing that London’s role as one of the world’s main financial hubs will not be threatened fundamentally. That is partly because rival European centres have their drawbacks — being too small, with restrictive labour laws or lacking the stability of English law — but also because of an underlying confidence that London will adapt even if it does lose some business.
Some early hopes for alternative growth priorities have been called into question. The idea, for example, of doing more to promote the nascent partnership with China in financial services may be undermined by the cooler Sino-British relationship that May seems to have signalled. Whether that hurts London’s fast-growing status as the biggest offshore renminbi trading centre remains to be seen.
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But other areas of growth — in start-up financial technology, for example — should be relatively unaffected by Brexit. Some already see London as the world’s most vibrant fintech hub. TheCityUK has highlighted the sector as a priority for expansion.
The mood in the City, as across the UK business environment, has undeniably been knocked by Brexit and the pervasive uncertainty on rules and regulations that will now follow, potentially for years to come. A weaker economic environment will make life tougher for many financial services operators, which is bound in turn to trickle down to the broader London economy.
As Brexit enthusiasts point out, though, the outlook cannot be that bleak because the stock market, after an initial wobble, bounced back strongly in the weeks after the vote. The focus now will be on the deal that the UK government, after consultation with the financial services industry, manages to extract from the EU. “The key,” says one person at the heart of that process, “will be to maintain the strength and eminence of the City, possibly in a different shape, and possibly in a smaller size, but still fundamentally strong.”