When the UK voted to leave the EU on 23 June 2016, there were fears that London’s financial industry would be hollowed out, or at least hampered, as British operations decamped for the Continent in order to be able to continue serving EU clients. Six years later, that has been partially proven true, although change has come slowly and not terribly dramatically. But there has been fundamental change.

“Financial services firms were negatively impacted by the uncertainty created around the future of the UK’s trading relationships with the EU following the referendum,” said Andrew Pilgrim, UK government and financial services leader at the consultancy EY in London. “What became apparent through the years of tracking the public statements of large financial services firms was how resilient the sector is and that, despite the initial fears of a mass exodus, the UK has retained its position as a leading global financial hub, even while the EU has continued to build up its domestic capital markets.”

Indeed, the number of “major planning applications” for new office space in the Square Mile, London’s historic financial district, has spiked, according to Catherine McGuinness, former policy chair at the City of London Corporation. (The City of London Corporation has a unique role as both a local government council and promoter of London’s financial sector.) In 2021, 400,000m2 of new office floorspace was approved, “an increase of almost 70% year-on-year.”

Numbers game

“While some business has inevitably relocated to the Continent, predictions of tens of thousands of jobs leaving the City have not come to fruition,” McGuinness commented.

Earlier this year, EY estimated there would be a total of 7,000 Brexit-related staff relocations from the UK to the EU, “significantly down from the peak of 12,500 announced in 2016,” (see chart, page 42). Meanwhile, financial firms have steadily been making fresh hires in both the EU and the UK, with the most recent growth “predominantly driven by an uptick in the number of staff hired in London,” EY stated.

, CEO of Luxembourg for Finance, a promotion and business development body, said the EY tracker has some flaws. “It only takes into consideration firms that have more than 200 jobs in London, leaving out quite a number of asset managers and fintech firms”. The study does not accurately track new roles created and what happens when an employee leaves a firm. For example, if somebody retires in London and is replaced in Frankfurt, “that’s not a ‘relocation’ of the person.”

By Mackel’s calculation, there have been “at least somewhere around 20,000 jobs created post-Brexit on the continent. That still isn’t a humongous number. It’s not been a Brexodus. But it shows that the centre of gravity for decision-making and for activity post-Brexit has clearly switched to EU hubs.”

Control vs access

“The premise underlying Brexit was taking back control and getting rid of EU regulation. The way it’s been presented is that [the EU] had been a break on exploiting the full potential of the City of London. Now, six years after” the referendum, “reality is kicking in.” There has not been “fundamentally much change”, Mackel said. The main difference today “is that the UK has lost access to the largest retail market and the most integrated single market in the world, thus cannot distribute any financial services or products directly from the UK into the single market. But it hasn’t gained anything else in compensation.”

The UK does not have many big international markets that it can tap, in his view. “I don’t think there’s any chance British funds will be able to compete on the US 401(k) market anytime soon,” Mackel said, referring to the popular private retirement investment plans. China, Japan and India “don’t have a history of being very receptive to welcoming non-domestic financial services. So what is left? The Commonwealth? Does that compensate for losing access to the EU single market? Certainly not. What is it that the UK then wants to do? Well, it’s positioning itself as welcoming the world to London, which is great, but which is exactly what it had been doing for the last 250 years in financial services, with a very high degree of success.”

The UK government is reviewing regulations with the aim of creating competitive edges in key segments. They very well may pass clever reforms. “The real problem is whom are you going to sell the product to? Most financial centres always have a primary geographic market.” For the UK, “that has always primarily been the EU. If you don’t have that, whom are you going to sell it to? That’s where the difficulty lies. So I really struggle to see how the UK can turn Brexit into a real opportunity besides what it already had,” Mackel said.

Other industry leaders agree. “There is no upside to Brexit in the UK,” , CEO of the fund data firm Kneip, told Delano. “How much downside remains to be seen, but there’s no upside.”

Structural shift

Part of the UK’s challenge is that the playing field changed shape following the referendum. “In the months following the EU referendum, UK financial firms voiced their intentions to bolster EU subsidiaries, move staff abroad and relocate headquarters in preparation for all possible scenarios,” in order to guarantee their ability to keep operating in the bloc, said Pilgrim.

The problem is those backup plans have evolved into firms’ main plans. “They had done this initially more or less on a shoestring, as a contingency operation, not knowing what the outcome” of EU-UK trade talks “was going to be,” said Mackel. “Now we are seeing that these contingency operations are in the process of being expanded. And you clearly see that EU activities are now not led from London any longer, but from various other EU hubs.” Major financial institutions now have their EU headquarters in Amsterdam, Dublin, Frankfurt, Luxembourg or Paris. “If you want to talk to the heads of EU operations, they are not sitting in London anymore. Three years ago, they were still sitting in London. When you want to talk to the guy who calls the shots on European affairs” today, they are more likely than not to be inside the EU. “That is the Brexit reality.”

“I don’t see any existing operator moving fund management companies or teams from Europe to London for the foreseeable future,” said a senior financial industry figure who did not want to be named. “However, this does not mean that there will be a significant movement in the opposite direction. Right now, given the EU regulatory environment, which is relatively benign to outsourcing functions to the UK, a certain stasis has been established.”

“If I were a new asset manager targeting the European market either as an investor location or as an investment location, I would think hard before establishing in London, however. It would be a bit like establishing in Canada to target the US market. Not impossible, but not the obvious move,” the figure said.

“The EU has basically closed the door to the UK in terms of the distribution of UK funds and UK distribution efforts within the EU although the UK put in place equivalency regimes for the distribution of EU funds into the UK,” said , partner at the law firm of Arendt & Medernach. “This is an opportunity for Luxembourg to position itself as a European centre of fund distribution.”

“On the other hand, the UK is considering initiatives to improve the attractiveness of the UK as a fund structuring jurisdiction,” said Niedner. These mainly are around private market funds, such as infrastructure and asset holding companies. “In addition, the UK is keen on positioning itself in the digital assets environment. Hence, the EU has to be aware of the UK as a serious competitor in the fund structuring environment, if a distribution within the EU is not key to the success of the fund.”

EU vs UK action

While the UK is likely to craft some competitive edges, Mackel is more worried about what happens inside the single market itself. EU regulatory missteps could provide London with an advantage without any action on the UK’s part. “Don’t forget, it’s not only about what the UK can do, it’s also about the EU seldomly missing an opportunity to shoot itself in the foot. If we change our regulatory framework in a way that provides the UK with an advantage, they don’t have to do anything. Take an example, the financial transaction tax. If we were to advance into that area, the UK doesn’t need to do anything” to regain attractiveness.

The senior industry figure struck a similar chord: “London has introduced the asset holding company, aiming to attract business in nonregulated parts of alternative investment fund structures. This would be clear competition for the expertise that Luxemburg has developed over the years. The success of this measure will depend both on Luxembourg’s capacity to keep its framework attractive and also on whether European regulation gets too burdensome.”

If the draft tax reporting rules known as Atad 3--sometimes called the Unshell Directive--“were approved and implemented in its initial form, unnecessarily burdensome for the alternative investment industry, then I think the UK could succeed in attracting more business. If, however, the final version of Atad 3 would be more focused, without the pointless collateral damage that we initially feared, then the impact of these new UK measures will be more limited. Recent informal comments from the EU suggest positive developments here,” the figure said.

Change around the edges

The tax rules illustrate the broader point: “while it will be difficult for the UK to deregulate to make London more favourable than the EU to attract international business, there is a risk of the EU introducing new regulation that is too burdensome and that may cause business to move to the UK.”

“Consequently, my expectation is that firstly, the UK will try to tweak its regime rather than engage in wholesale deregulation,” the figure said. “Ultimately, part of the attraction of the UK historically has been to access the European market and to maintain this position, the UK will have to align with EU rules. To some extent, the UK therefore becomes a ‘rule taker’ from the EU. The irony of this is not lost on the financial sector.

“Secondly, having accepted the limits of regulation, the UK will seek to make itself attractive by better application of the rules, for example, by having more business friendly administration of the rules as opposed to changing the rules themselves.”

Specific national challenges cannot be underestimated either. “Luxembourg has its own problems,” Sacau observed. “The situation with bringing [cross-border commuters] back to the office poses an existential threat to our ability to attract and retain talent. They want to work from home, like every other western worker and, unlike in London and in Paris, we can’t give them that freedom. This is why some Luxembourg firms--and I can think of quite a few--are keen to strengthen their position in London.”