Major EU cities are now vying to take much of London’s spotlight as the dominant financial centre in Europe following the Brexit vote that could strip the UK capital of its passporting rights, the ability for companies to make transactions seamlessly and list their debt and equity securities on other EU exchanges.

French prime minister Manuel Valls has announced tax cuts and other incentives aimed at attracting finance firms in London, declaring, “We want to build the financial capital of the future. In a word, now is the time to come to France.” Ireland’s capital, already a successful a low-tax and business friendly FDI hub, and German financial centre Frankfurt are also marketing themselves as contenders, while Berlin has adopted the marketing slogan: “Keep calm and move to Berlin.” At present, no one seems to authoritatively know if or to what extent London-based financial services will be able to keep their passporting rights – or, indeed, whether they will have to relinquish them at all. 

Advertisement

“Clearly there is a risk to the UK financial services sector that business will relocate to somewhere in Europe. Some relocation seems inevitable, the extent of the risk depends on the deal that is reached,” says Elizabeth Budd, a partner in the financial regulation group at law firm Pinsent Masons.

Given that financial services comprise 8% of the UK’s GDP, this risk should be of enormous importance to the UK, says Walter Bilas, a senior tutor at the UK’s University of Law. “This [passporting] advantage could be lost as a result of Brexit, and given the importance of the City and financial services to the UK economy generally, it is crucial that this aspect of the single market is retained in any new arrangement with the EU. Failure to retain passporting rights will impact negatively on UK companies looking to offer their securities as widely as possible and so reduce/make more expensive the amount of capital they might otherwise have access to for the purposes of expansion,” he says. 

However, the professor argues, London’s long-held global status is unlikely to be severely affected. “At the moment it is difficult to pinpoint precisely how London might suffer as the world's leading financial centre because we simply do not know the shape or outcome of any UK /EU deal,” he says. “Having said that, London has been a global financial centre for a long time, pre-dating even our accession to the EU in 1973. There is an argument that unravelling this legacy simply because we are no longer in the EU has little cost benefit, so it is likely that the preservation of the City's pre-eminence as a global financial centre will be robustly defended in the Brexit negotiations.” He notes that London remains number one in the 2016 Global Financial Centres Index.

Christian Cornett, a Frankfurt-based corporate partner at law firm King & Wood Mallesons, stresses the extent to which circumstances around passporting and other aspects of the Brexit changes are still unknown. “Many ‘experts’ seem to anticipate that passporting won’t be possible from 2018 or 2019. However, let’s wait and see what solutions and compromises will be found,” he says. “Many have anticipated that some activities will shift from London to other European financial centres located within the EU, in particular Paris, Dublin, Frankfurt and Luxembourg. There may be a shift away from London, but exactly what shifts, and to where we will witness in the years to come, will foremost depend on the future agreements between the EU and UK.” 

These cities – with the addition of Amsterdam – could very well benefit, Ms Budd agrees.

However, she argues that they have varying weaknesses relating to infrastructure. “By that I mean not only housing, schools, suitable office space and so on, but all the IT, expertise, bandwidth,” she explains. “You don’t just move your trading desk – you need the speedy connectivity and so on. Will any of these cities be able to cope with a sudden influx of ex-City of London workers and their families?”  

Observers agree that different EU hubs will offer different advantages, but much will depend on the regulatory and tax frameworks in the relevant member states, among other criteria. “In Dublin, most people speak English. Paris is already a major hub for large French banks, a large city with relevant authorities and a good climate for certain financial transactions, with potentially more going forward,” Mr Cornett points out. “Luxembourg has the advantages of being a flexible, niche player with tax, regulatory and service advantages. A city like Frankfurt has other advantages: being the financial centre of the strongest European economy, a very efficient infrastructure, a location in the very centre of Europe with high standing and credibility.”

Others remain confident in London’s centrality as a financial hub. “We anticipate that London will remain a key hub for international finance transactions, despite competition from other European cities,” says Dominic Griffiths, co-head of legal services provider Mayer Brown’s global finance practice. He highlights the importance to London-based financial institutions of the city’s highly skilled talent pool, as well as the certainty that the UK’s regulatory and legal frameworks provide. “Several leading banks have also recently announced their determination to help ensure that London remains a key global financial centre,” Mr Griffiths adds. “We may see some teams within our clients move to Paris and Frankfurt – like many of our clients, we are already deeply ingrained in the business community in both cities and are well placed to react to any transition.”

The foremost takeaway from any financial observer’s analysis is that there remain too many unknowns to concretely predict what London’s fate will be. “It’s difficult to predict that a significant chunk of the activities which are currently performed in London will shift away from the capital within the next 12 months,” remarks Mr Cornett. “Rather than a short-term relocation of such activity, I would expect a more or less significant slowdown of London based activity due to the uncertainty caused by the Brexit vote.”