New thinking

London after Brexit

Brexit has sparked fears London will lose its status as the world’s second most important finance hub after New York. Is it just a lot of hot air?

London has a fight on its hands, or so we are led to believe. Nervy businesses are relocating, moving staff or setting up new entities in rival European cities including Paris, Frankfurt, Dublin and Amsterdam. Others are threatening to follow suit.

Meanwhile, Hong Kong, Singapore and Shanghai continue to rise in importance as finance and business powerhouses, providing arguably far greater competition for the UK capital.

London’s position looks shaky.

Or does it?

Despite years of uncertainty over Brexit and repeated threats of a business and finance exodus, London has pretty much carried on as normal outside the political arena. In fact, jobs in the City are at a record high and both jobs and output continue to grow, according to statistics from the City of London Corporation. And London remains the world’s leading wealth centre in the Knight Frank 2019 Wealth Report.


Reasons to be optimistic

It seems the UK capital is far more resilient than many people imagined when the Brexit die was first cast. Much of this resilience is down to the UK capital’s unrivalled infrastructure, talent pool, strong regulators and easy access to capital.

Sir Peter Estlin, Lord Mayor of London from 2018 to 2019, is “optimistic” about London’s ability to retain its status post-Brexit given the capital’s unique characteristics.

Commenting on fears London’s position is under threat, he says: “Let’s stop all this doom and gloom.  Periods of change can add uncertainty but we need to be continuing with the steps we are taking and talk about the huge scale of innovation we are seeing.”

He adds: “If you look at traditional businesses such as asset management, banking and insurance, they are still in a fairly robust position. In many ways we are in a better position than we have been for quite a while.”

The former Sheriff of the City of London, who was CFO for Citigroup’s investment and corporate banking divisions in New York and London, continues: “We have a government in the UK which is pro-growth. I have not seen any sign that they are going to change that. It’s up to the business community to continue to do what they are doing well.”


London and New York still reign

The UK capital continues to vie with New York as the world’s top finance centre, according to the Global Financial Centres Index (GFCI), the world’s most authoritative comparison of the competitiveness of the world’s leading financial centres. London’s closest European rivals – Zurich, Frankfurt and Paris – are way down the in 14th, 15th and 17th positions respectively, with Dublin 38th.

The actual formal departure from the EU on 31 January 2020 had little effect on the markets. The UK is now in a transition period in which both sides will seek to agree on their future relationship. During this period, due to end on 31 December 2020, the UK will continue its trading relationship with the EU and follow EU rules, providing a degree of stability.

So, are fears the UK capital will lose out to European rivals post-Brexit completely overplayed?


Big freeze

Professor Michael Mainelli, Sheriff of the City of London and co-founder of Z/Yen, the think tank that publishes the GFCI, stresses Brexit to date hasn’t been the calamity many people predicted.

Commenting on the original vote to leave the EU, he says: “Large institutions did not go away the next morning. They did not stick their things in a suitcase and disappear. What they did do was put a freeze on locating new business units in London.”

How long this freeze remains is open to question but it suggests that, apart from a few exceptions, businesses may have no intention of leaving London for the likes of Frankfurt or Paris.


Brexit noise

Professor Mainelli believes Brexit is distracting attention from a much larger sea change in the global financial landscape – the rise of Asia.  In the latest GFCI rankings, Hong Kong, Singapore and Shanghai have risen to 3rd, 4th and 5th respectively, edging ever close to London and New York.

“In around 2009, when our index indicated that Hong Kong, Singapore, and Shanghai are going to be leaders by 2020, nobody listened,” the professor says. “Within that timeframe, the rise of Asia has been phenomenal. The noise around Brexit should be overshadowed by what’s happening in Asia.”

This ‘noise’ could continue for some time. UK Prime Minister Boris Johnson is desperate to secure a free trade agreement with the EU by December 2020 but, at the time of writing, we have no idea what economic relationship London will have with the EU in the new post-Brexit world. Neither do we know what trade deals will be struck with the US, China and other countries outside the EU.


Strong position

Sir Peter Estlin points out negotiating a trade deal with the EU is just one of a plethora of international issues impacting London including the rise of digitalisation, the fight to tackle the effects of climate change and increasing parochialism globally.

“Of course, there are risks,” he says, before stressing: “Our starting position is a strong one. We are not in the top two of world financial centres for nothing. The infrastructure, the talent, the strong regulator, all these factors are important.”

There are compelling reasons why London can continue to hold its own, not just against rival cities in Europe, but also worldwide.


Pulling power

Apart from the benefits of language, geography, time zone and infrastructure, London is home to world renowned financial institutions and a wealth of professional support services. It boasts a thriving SME sector, a fast-growing tech sector, and perhaps most importantly a respected rule of law – the framework that provides the confidence businesses need to invest.

Professor Mainelli says the rule of law is “absolutely critical” to London retaining its leading finance hub status. He points to the historical importance of the UK rule of law in attracting businesses to the capital over centuries to strike deals. He explains: “London has the jurisdiction that they needed,” adding “Shipping, oil, gas, mining and other industries – everything goes through the legal system. It attracts a lot of business including science industries and technology.”

He believes London also has the potential to thrive as “an SME engine” and “offshore centre”, adding: “London is the place where international deals can be struck. London is still seen that way.”


Vibrant financial capital

Other business leaders have expressed confidence in London’s ability to weather the Brexit storm, including the new head of Citigroup in Europe, David Livingstone. He told the Financial Times (FT) London isn’t going to lose the benefits of “a vibrant financial capital” such as the “huge support mechanisms” from a wealth of professional services firms.

Last year, Citigroup bought a £1bn skyscraper in London’s Canary Wharf, underlining its faith in the UK capital. In an interview with the FT, Livingstone described the purchase as a “positive statement about our confidence in London”.

In contrast, French oil company Total is moving on. Chief executive Patrick Pouyanné in January announced Total is to move its treasury activities to Paris. Confirming the move on social media, he tweeted: “It’s simpler from an operational point of view.”


Sophisticated ecosystem

Looking at what makes London special as a finance hub, it would seem unlikely that the trickle of businesses upping sticks will become a torrent. London has a sophisticated global market ecosystem and it doesn’t look like it will crumble anytime soon. There are few if any places in the world with such a dense concentration of finance companies and professional services firms as the Square Mile.

Sir Peter Estlin says the continued move towards a service-based culture will play to London’s “positive strengths”, as will London’s role within the Commonwealth as the government seeks to reach new trade agreements around the world.

There is also an environmental argument. London ranks highly in the Global Green Finance Index, based on the depth and quality of its green finance offerings. Only Amsterdam, Luxembourg, Copenhagen, Stockholm and Zurich rank higher in the world.

It is clear London retains significant pulling power but how will it continue to attract and retain businesses and see off rivals in a post-Brexit world?


Staying ahead

Professor Mainelli outlines seven key factors that businesses need to consider when deciding whether to choose London above other world finance hubs:

  1. The rule of law
  2. Predictability
  3. Breadth of talent
  4. Trust and fairness
  5. Immigration
  6. Relationship with the EU
  7. Simplicity

While the rule of law is strongly in London’s favour, predictability isn’t, given recent political events. There are those who predict a return to British pragmatism before long but the EU could be regarded as more stable, with decisions made after long consultation periods.


Trust and fairness

Trust will be important in attempts in securing international trade deals as well as retaining London’s position Currently, global companies’ trust in London as a place to do business is relatively high.

Commenting on fairness in business, professor Mainelli says: “What we are going for is free trade but deeper than that is the question, ‘are we going to treat all comers fairly?’.” He cites examples of taxes imposed on the oil industry in the past and problems with funding renewables due to uncertainty.

Changes to immigration rules could play a pivotal role in London, especially in the fintech industry which has a high proportion of foreign national owners. “We have relied on the EU to be an avuncular disciplinarian,” professor Mainelli says, pointing to the way the EU has attempted to steer member states away from imposing their own rules on immigration, fishing and other contentious issues.

In terms of simplicity and ease of doing business, London again scores highly although changes to tax codes could complicate matters.

London may have lost some of its shine amid the Brexit storm, and the post-Brexit transition period leaves many questions unanswered, but the city remains a world magnet for investment and business.

If the UK government manages to overcome the significant challenges it faces in the years ahead, London is well placed to remain one of the most important finance hubs in the world. It weathered the pre-Brexit storm. Now it must weather the post-Brexit transition.

Sir Peter Estlin says the capital must not be seen isolation, pointing out growth across the UK should be the objective. “What we need to be doing is promoting the UK. It doesn’t matter where the jobs are created,” he says, adding: “If we carry on what we are doing we will be ok.”

As the post-Brexit transition period kicks in, London and indeed the UK is very much open for business.

This article was written for Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.