Implications of Brexit for the UK financial services sector
There are fears that thousands of jobs could be lost in financial services following the UK’s exit from the European Union. This blog piece explores some of the implications of Brexit for London’s financial hub, including the reactions of US banks.
The implications of Brexit for employment in the UK financial services sector remain unclear. Many global banks and finance companies have their main European headquarters in London, from which they sell to clients within the EU. These institutions fear that they will lose the ability to passport their services in this way across Europe after Brexit, so they are establishing new subsidiaries or building up existing bases in the other EU Member States.
There are fears that this will result in significant job losses in the City of London, with estimates of as many as 75,000 jobs going and a £10 billion decline in UK tax revenues. The main destinations for departing jobs will be Frankfurt, Paris, Dublin and Amsterdam. In circumstances where Brexit undermines the City’s ability to function as the primary ‘clearing house’ for euro-denominated transactions, estimated job losses could be over 200,000.
Accountancy firm EY has calculated that some 10,000 jobs will be moved out of the City of London on day one of Brexit – both back office and front office functions. EY has been tracking 222 companies since the June 2016 referendum and has indicated that 31% of these companies are considering moving some of their operations and staff out of the UK or have already confirmed that they will do so. For example, Goldman Sachs, which has around 6,000 staff in London, has taken eight floors of a block under construction in Frankfurt, even though the company is building a new European headquarters in London.
A Reuters survey has estimated that around 10,000 finance jobs will be moved out of the UK over the next few years in the event that the UK is denied access to Europe’s single market. According to the findings, nearly half of the companies surveyed said that they planned to move staff or restructure their businesses on account of Brexit, a third said it would have no impact, and the remainder said they were still undecided or declined to comment.
The Reuters survey suggests that the immediate job losses from Brexit may be smaller than some estimates and that London may be able to retain its place as the continent’s principal finance centre – at least in the short term. However, it also points to the expectation of bigger moves out of London taking place over the decade following Brexit, with a slow drain of jobs from London over a number of years. Some companies are likely to delay making a decision, hoping for a soft Brexit, although Mark Carney, Governor of the Bank of England, has warned against this approach, urging companies to start planning now.
The Financial Times recently reported that a number of large US banks, such as Morgan Stanley, Citigroup and Bank of America, are drawing up plans to use the London branches of their EU subsidiaries as stopgaps until they have built new headquarters elsewhere in Europe and recruited the necessary specialist staff outside of London. However, it is not certain whether European regulators will allow banks to keep staff in the UK if they are handling transactions with EU clients.
The report stated that some US banks are also planning for the worst in terms of the fall-out from Brexit, having expressed to the US commerce secretary their dismay at the state of the Brexit negotiations. Bank of America is currently merging its UK bank into its Irish operation, making it a branch of the Irish subsidiary, which is thought to be a part of the bank’s worst-case scenario planning.
It is clear that the coming year will be crucial, not only for the Brexit talks as a whole, but specifically in terms of the impact of Brexit on the City of London. If it looks like a hard Brexit is looming, banks may well begin to step up efforts to move their operations to alternative EU locations.
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