London has flourished as a financial hub over the past two decades in part because global banks could sell their goods and services freely around the European Union’s 28-nation trading bloc — a $19 trillion integrated economy with more than 500 million citizens — from their offices in the City of London financial district. Now that British voters have elected to leave the EU, London’s status as a worldwide hub of banking is very much under threat. If Brexit curtails the U.K.’s access to Europe’s single market, London becomes a far less attractive place from which to do business.
1. Who might have to pack up?
An obvious candidate is clearing, a service provided to help traders complete their transactions safely and at the price at which they executed them. Clearinghouses such as those that call London home collect fees to act as intermediaries between buyer and seller, requiring traders to post collateral — cash or bonds — as a cushion against losses and potential defaults. Other bank businesses that could be part of an exodus from London include euro-denominated derivatives and corporate bonds, while other specialties such as commodities and foreign exchange would be likely to stay in London no matter what, according to a report by the Boston Consulting Group.
2. What would that mean for London?
Withdrawing from the single market — a “hard Brexit,” as it’s being called — would cost banks and associated businesses in the U.K. almost 40 billion pounds in lost revenue, and put 70,000 jobs at risk, according to consultant Oliver Wyman & Co. Executives at banks including Morgan Stanley, Citigroup Inc., Deutsche Bank and JPMorgan Chase & Co. have said they would have to move staff and operations out of the U.K. to service their EU clients if Britain’s access to the single market is curtailed.
3. So will the U.K. be leaving the single market?
Much depends on whether the U.K.’s exit agreement maintains the so-called passporting rights that make London a financial capital.
4. What is passporting?
Under EU law, any company incorporated in one country of the European Economic Area — currently comprising the 28 EU states plus Iceland, Liechtenstein and Norway — can sell its products and services throughout the bloc. This authority, known as passporting, allows global investment banks to get by with only satellite offices in hubs like Paris and Frankfurt, keeping the overwhelming bulk of staff in London. It seems highly unlikely that Prime Minister Theresa May will be able to retain passporting rights in Brexit negotiations without bending on immigration, her top priority. The price of membership in the EEA is contributing to the EU budget and following its rules, including the free movement of workers, while having no voice in making them.
5. Would the U.K. have no access at all to the single market?
Banks in London will continue to have some form of access to Europe after Brexit, whatever the outcome of negotiations between May and her EU counterparts. At issue is whether they will have to pay tariffs to do so.
6. Would non-British bankers in London be sent home?
May has said she cannot guarantee the rights of EU citizens living in Britain without reciprocal agreements from her European counterparts. EU nationals who have lived in the U.K. for at least five years automatically have a right to stay permanently, and vice versa. The Czech Republic and other central eastern European countries are particularly animated about ensuring that the rights of their citizens to work in the U.K. are protected after Britain formally exits the EU, with some threatening to veto any deal that doesn’t allow for that. There are about 3.2 million EU migrants living in Britain, according to the Office for National Statistics. The United Nations estimates that about 1.2 million people born in the U.K. live in another EU country.
7. What rival EU city might challenge London?
Frankfurt, Paris and Dublin are among the cities jostling to woo banking talent from the U.K., but no other European location quite matches the City of London’s depth of markets, breadth of expertise or regulatory appeal. Privately, bank executives are concerned that local European regulators would struggle to cope with an influx of financial services firms looking to set up shop. While banks will move some operations to the continent to ensure access to its market and activity in its time zone, they could ultimately move more across the Atlantic as New York proves the only other genuine one-stop shop for business after Brexit.
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