Small businesses and financiers across the United Kingdom are increasingly concerned that London is not a top priority in Brexit negotiations, leading to fears about its financial future. Although the UK government has undertaken important steps in negotiating Brexit, it is yet to address key challenges regarding London’s status as the world’s leading financial center. In order to make Brexit a long-term success, policy makers and negotiators should make the City, London’s financial district, a priority of Brexit discussions.
A year after Brexit, London still holds the title of the world’s number one financial center, ahead of New York, according to the Global Financial Centres Index. No other European city makes it to the top 10 of this list, which ranks global financial centers according to their competitiveness. Indeed, the City is far ahead of its European competition in attracting companies and banks from all over the world. 40 percent of global companies headquartered in Europe call London their home. In comparison, only eight percent and three percent of such companies call Paris and Madrid their home. Frankfurt—supposedly London’s main rival—is home to less than three percent of European headquarters.
Given London’s prominence in Europe, its importance to the United Kingdom could not be overstated. Employing more than a million workers, the City accounts for seven percent of the UK’s GDP and is the United Kingdom’s largest exporter to the European Union (EU). As Brexit negotiations get underway, Frankfurt, Paris and Dublin are making efforts to poach businesses away from the City. In light of Brexit uncertainties and heightened competition, London faces four important challenges that the UK government must address.
First, British businesses are increasingly worried about Brexit uncertainties and the lack of a transition period, especially in light of the March 2019 deadline. To appease such uncertainties, UK negotiators would be well-advised to advocate a longer transition period for businesses, especially financial services firms.
A longer transition period would help not just British businesses, but also businesses across the European Union, a point that UK negotiators could highlight in the current negotiations process. Dismayed by growing uncertainties and the possible lack of a transition period, BusinessEurope—which represents more than 20 million companies in 34 countries across the region—recently warned that “thousands of companies which operate outside of the UK but rely on UK firms are getting ignored and left behind in the Brexit process.” To appease uncertainties on both sides of the Channel, EU and UK policy makers would be well-advised to introduce a transition period for businesses that extends beyond March 2019.
Second, many financiers fear that the United Kingdom will lose its “passporting rights,” which currently allow firms based in London to serve clients across the European Union. While the UK government must do what it can to secure passporting rights, recent research by Moody’s suggests that fears regarding the loss of passporting rights is overstated, stating the impact of the loss would be “modest” and “manageable.” Furthermore, even if a new deal fails to secure passporting rights, the upcoming set of financial regulations in 2018, called Mified II, are likely to provide some British financial firms an alternative way of accessing the EU’s financial market—although this would require those firms to maintain the same level of compliance as required of EU firms.
Thirdly, following Brexit, the European Union might try to poach the euro clearing market based in London. The largest clearing market in the world, London plays a key role in safeguarding trillions of derivatives transactions, in the euro, dollar, and other notable currencies. Following the Brexit vote last year, a number of EU leaders—including the then French president François Hollande—demanded that the euro clearing market based in London be moved to the eurozone. But as Philip Hammond, the UK’s chancellor point out—if the European Union attempts to thwart London-based clearing activities, it will invariably fragment the market for euro clearing, raising annual costs for EU firms by at least €22 billion.
However, the European Union appears to have softened its tone. Instead of moving the clearing house, it is now more open to greater regulation of euro-denominated clearing activities in London. On the UK side, a growing number of clearing houses—including the largest one, London Clearing House—are willing to accept more direct oversight from Brussels, pointing out that dollar-based clearing transactions are already subject to oversight from US regulators. The UK government must ensure that following Brexit, the $1 trillion-dollar industry can remain in London post-Brexit although it might be subject to increased scrutiny by Brussels.
Lastly, immigration remains a major challenge for the City, for which EU workers make up 15 percent of the labor force. Given that the current UK government wishes not to remain part of the European Economic Area, it has a number of policy options through the UK Border Agency to address the labor market shortage within the City. It could introduce a points-based work visa system for European workers, designing extra points for those with prior financial services. A points-based system would allow the City to recruit the best workers not just from the European Union, but also the United States and countries around the world. If there is still a labor shortage, the UK Border Agency could of course add the financial services industry to its list of shortage professions—which it already does for several sectors, including healthcare and energy.
Although Brexit poses a number of key challenges for the City in the short term, it also provides an opportunity for London to be more dynamic and prosperous in the long run. However, UK policy makers must first address London’s pressing concerns and make its future a key priority during negotiations with the European Union.