City under threat as Brexit perfect storm brews: reports

The City, the UK’s financial centre that accounts for more than 11% of the country’s GDP, is facing what could be seen as a perfect storm, with two recently-published reports highlighting vast numbers of firms looking at possible exits and reports that the EU is preparing a pre Brexit rule change, that could deprive London of essential financial business. 

With 50-year-old trade links, tens of thousands of jobs at stake and, as reported, the UK government recently refusing to publicly back the financial sector at a reportedly tetchy ‘secret’ meeting held at the Shard in London with City bosses and UK chancellor Phillip Hammond and Brexit secretary David Davies, the other week, London’s stranglehold on the title of Europe’s main financial centres and one of the world’s top three centres, is looking increasingly precarious.

According to a report in The Financial Times yesterday, before Article 50 has even been triggered, moves are afoot within the EU to deny the City rights to one of its main areas of financial business by enabling territorial restrictions on the clearing of some euro-denominated transactions even before Britain leaves the bloc.

Euro derivatives

London is the world’s biggest centre for clearing euro derivatives, handling three-quarters of all transactions but the European Commission is considering backing legal changes to give the European Central Bank a remit over the location of key market infrastructure, The FT reported.

The UK has been fighting for years to fend off threats, particularly from France, to relocate Euro clearing to an area that actually uses the EU’s single currency area.

The FT states that French officials are pushing for restrictions on clearing to be included in legislative proposals scheduled for Spring 2017 — shortly after Britain says it will initiate the formal Article 50 exit process.

The paper, reported to have been seen by The FT, argues that “forced repatriation” of euro clearing would “deprive European banks of access to liquid trading and clearing facilities and create fragmentation”. ICE, the largest operator of exchanges and clearinghouses in European utilities, added: “This would increase costs considerably for banks and customers.”

Jobs under threat

Also this week a Brexit committee has warned that tens of thousands of financial services jobs could be lost to Europe across the next 12 months if ministers do not move quickly agree a deal on single market access with the EU.

And more than one third of US businesses with a base in the UK are considering moving their base to elsewhere in the European Union because of Brexit.

A report published this week by the House of Lords Brexit committee called for urgent action to secure a “transitional deal” on EU passporting rights for the financial sector.

And a study by research specialists Gowling WLG, carried out across September and October this year from a sample of 533 senior executives of companies with £10m annual turnover based in the US who export in a variety of sectors including financial services, found firms preparing to work around, rather than with the UK.

More than half of US businesses that export to the EU said that they are more likely to bypass the UK to do business with the rest of the continent as a result of June’s Brexit result.

For financial services, a total of 55 per cent of US companies surveyed said that they are more likely to bypass the UK in order to do business with the rest of the EU. And just under half – 47 per cent – of those with a base in the UK said that they are already considering moving their operations elsewhere in the EU as a result of the Brexit vote.

50-year-old trade links

The report, which looks at the impact of Brexit on transatlantic trade, shows how the uncertainties surrounding Brexit, in particular the delay caused by issues such as Article 50, are severely threatening trading links between the UK and the US.

Bernardine Adkins, head of European Union, trade and competition for Gowling WLG Brexit Unit said: “The strong UK-US trade relationship that has been carefully nurtured over the past 50 years is in serious jeopardy. This is despite a wide consensus amongst US firms that the unique dynamics of the UK market and its access to the rest of the EU drive their preference for doing business here. Concerns that Brexit will have an effect on current investment decisions mean this needs addressing now, not later.”

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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