The Brexit vote has raised German ambitions to become the new financial centre of Europe. But the recent decision to move the European Banking Authority to Paris highlights that this process is far from straightforward.
On 12 July 2016, just weeks after the British vote to leave the European Union, Volker Bouffier, the state premier of the German Federal State of Hesse, held a speech in response. One might wonder why the political leader of a German province feels the need to respond to an event in British politics. But the state of Hesse includes the city of Frankfurt, Germany’s financial centre and home to the European Central Bank, making it a likely candidate in the battle to take over London’s position as the financial centre of Europe.
While Mr Bouffier’s statement expressed regret over the British decision, between the lines, his ambitions could not be overlooked. He mentioned how initial talks with EU Commissioners in order to move the European Banking Supervisor and the European Pharmaceutical Agency to Frankfurt had occurred.
A similar optimistic outlook can be found in a recent study conducted by Otto Beisheim School of Management, which assumes that Brexit will lead to 10,000 additional banking jobs in Frankfurt.
But Frankfurt is of course not alone in its ambition to attract firms exiting the UK. For the asset management industry in particular, the city faces powerful competition, most notably from Luxembourg, but also Ireland and Paris. German Investment Funds Association BVI warns that the asset management industry might not be able to compete with other countries. “Most London-based asset managers already have management companies in Luxembourg and / or Ireland and therefore already a foot in the door of the new EU, we anticipate that the fund industry will see a lot less relocations than the banking sector” the BVI says.
At the same time, the logistical and regulatory burdens of a potential relocation are a lot less complex for asset management firms stresses Felix Hufeld, president of German financial market authority Bafin.
Jumping into the deep end
At the time of writing, very few asset managers have confirmed definitive decisions on their relocation. While some, including Goldman Sachs, have already progressed their contingency plans, they remain reluctant to play with open cards. The US firm has recently signed a lease agreement for the upper floors of the Marienturm in Frankfurt, offering space for up to 1000 staff members. It’s CEO, Lloyd Blankfein left ambiguous messages Twitter, suggesting on the one hand that he intended to spend a lot more time in Frankfurt, whilst also reporting on increased investments into its UK presence and the positive energy from meetings in Paris.
Other Wall Street giants, including Morgan Stanley and J.P. Morgan as well as BlackRock have confirmed that Frankfurt is on their shortlist for potential relocations but have yet to reveal a definite decision.
One indicator for the scale of demand is the number of banking license applications which the local regulator has received. Raimund Röseler, chief executive director at German regulator BaFin reveals: “BaFin is currently working on ten authorisation procedures in total. This number may yet increase, however, as Germany is a possibility for quite a number of institutions that are still in the process of deciding” he stresses. “In addition to this, several institutions that already conduct business in Germany as banks will expand their business, which means that they will not be required to submit a formal application for authorisation” Röseler predicts.
Regulatory and fiscal challenges
According to the BVI, the potential introduction of a financial transaction tax constitutes a key reason for asset management firms not to relocate to Germany, as neither the UK, nor Luxemourg or Dublin are currently considering the implementation of such a measure. Other planned legislative changes such as the implementation of Mifid II through the German FiMaNoG law also come with additional costs for listed investment funds and could deter asset management firms, the BVI warns.
On a regulatory level, the Bafin’s level of supervision is comparable to that of the FCA, the BVI argues, although steps could be taken to improve its services, including the translation of information brochures on registration into English and the digitisation of BaFin’s filing system. The BVI also suggests that asset managers which are already registered with the FCA should go through a simplified application procedure in order to register their business in Germany.
Another key ambition for the German financial industry is to increasingly shift the UK’s clearing business to Frankfurt. Eurex Clearing, which is part of Deutsche Boerse Group, has recently announced the launch of a new partnership programme, in a bid to pull business from its London competitor LCH Clearnet.
Thomas Richter, CEO of BVI adds to that: “For the fund industry, the advantages of having the euro clearing operations located within the EU are obvious: reduced costs, improved investor protection and greater financial stability”.
The clock is ticking
While March 2019, the date at which the British government currently aims to exit the European Union, still seems like a long way to go, financial services groups, including asset managers will have to make their decisions on relocations much sooner.
Miles Celic, CEO of industry body The City UK stressed in a recent hearing at the House of Lords’ European Union Select Committee: “Most institutions will want to see significant progress before Christmas, and certainly in the first quarter, which will be a point of no return for most companies, as they need to apply for banking licences well in advance in order to relocate their business” he said.
While the clock is ticking, Germany finds itself in a period of sustained political instability, with Angela Merkel failing to form a coalition government. According to Carsten Mumm, fund selector and head of Capital Market Analysis at Donner & Reuschel, new elections are now the most likely scenario. “The stability which Germany used to represent has clearly been affected since the Federal election, with both the mainstream parties losing a large share of their vote and the growth of the AfD party. New elections will not help to stabilise the situation but lead to a continued period of uncertainty for markets” he warns.
The prospect of political uncertainty might represent an obstacle to Frankfurt’s aim to attract the financial industry. Indeed, by November 2017, it transpired that the Banking Supervisor would move to Paris while the Pharmaceutical Agency will move to Amsterdam. While Frankfurt may have big ambitions, it remains far from certain whether it will reap the benefit of a potential exodus from London.
The full article can be found in the December / January issue of InvestmentEurope.