Following Prime Minister Theresa May’s speech at the Conservative Party conference last Sunday, the dividing lines over what Brexit will mean in practice have become much clearer. Britain is now most likely to leave the EU single market, customs union and jurisdiction of the European Court of Justice – the so-called ‘hard Brexit’ option.
The UK leaving the single market will have a negative impact on most sectors of our economy, particularly exporters. The one sector where the gains may outweigh the losses is financial services. Hard Brexit creates two major headaches for the City of London – the loss of ‘passport’ rights that enable financial firms to operate across the EU from a UK base and the fact that there are likely to be significant restrictions on executives from EU countries coming to work in Britain.
In a report issued this week, consultants Oliver Wyman estimated that a hard Brexit could cost financial firms over €45 billion in lost revenue. More concerning for the City is the strong mood music from No.10 that they will get no special favours in Brexit negotiations. By contrast, Bloomberg reported that the government will refuse to prioritise the protection of the financial sector after the U.K. has left the European Union and has privately dismissed the City’s key demand for an interim deal with the EU to help ease the transition.
None of this has gone unnoticed in Europe’s other financial centres, which are busy making their pitch to London-based firms. Politico’s Morning Exchange reported that bankers have witnessed a flurry of “beauty parades” from the likes of Frankfurt, Paris, Dublin, and Luxembourg, as it becomes clear that at least some operations will have to be exported to the EU after Brexit. And therein lies the rub for Ireland and Dublin in particular. Is our offering compelling enough to fend off competition from other long-established and ambitious competitors? You would have to conclude that to date the jury is still out on that question.
In our favour Minister of State for Financial Services, Eoghan Murphy has been on the road promoting the IFS 2020 strategy, which seeks to increase financial services jobs by 30% within the next few years. Meanwhile Gerry Cross, Director of Policy & Risk at the Central Bank told a Deloitte Brexit briefing that there was potential for a material increase in financial firms moving to Dublin from London once the UK leaves the EU, but they would have to establish a “substantive presence” here in order to retain their passport rights. The clear message was that there is no official appetite for ‘brass plate’ operations establishing here post-Brexit. Cross was very explicit in spelling this out, stating that the Central Bank will want to see that the board and the management are located here, that the business is run from here, that the decision-making happens here and that this flows through to the level of staffing the Bank expects. Overall you could say Ireland’s competitive strategy is cautious and purposeful.
Contrast this with Frankfurt and Paris, both of which appear to be applying a little more flair to their efforts to attract financial firms. Frankfurt’s pitch is that it will offer firms the opportunity to run operations that have to be based in the EU from Frankfurt and those that don’t from London under the same regulatory and financial umbrella. Politico described Frankfurt’s offer as “innovative and daring” by allowing a more seamless link between firms’ London-based operations and their EU outposts.
Meanwhile the French regulator has made it easier for UK firms to apply for a French licence. Under their two-week process, institutions currently regulated in London can get a fast-track “pre-authorisation” to open for business in Paris. The BBC reported that the responsiveness of the French regulator is one of the changes - Paris advocates say - which will surprise newcomers.
Given this country’s recent troubles caused by lax regulation of banks – including in the IFSC – you can understand why the underlying approach of the Government and the Central Bank towards attracting financial firms here following Brexit is perhaps more cautious than our competitors. And it is of course critical that we get real operations and the jobs that go with them here – not just brass plates. That said, given the intensity of the competition and the strengths of our competitors, you would have to conclude that we need to up our game and become a bit more innovative and daring too if we want to turn Brexit into a real opportunity to build a European powerhouse in financial services.