The UK’s financial services sector post-Brexit: To what extent have jobs and capital been forfeited to the EU?
Few need reminding the UK left the EU in December 2020, the parties having failed to reach agreement over financial services industry protocols beforehand. Uncertainty surrounded the processes by which business would be conducted in the absence of the passporting rights that previously applied. The EU pushed back the UK’s drive for equivalence and the Memorandum of Understanding signed in March 2021 merely declared a willingness to negotiate a framework for regulatory cooperation on financial services. A definitive outcome hasn’t materialised and, while the EU has proposed an extension to temporary equivalence for UK-based clearing beyond June 2022, it’s uncertain how long this will last.
Pessimistic forecasters predicted tens of thousands of jobs would be lost to Europe by getting Brexit done. Financial services contributed £164.8 billion to the UK economy in 2020, 8.6% of total economic output. There were 1.1 million financial services jobs, 3.3% of all occupations, around 418,000 of which were in London alone. In the light of these numbers, the UK’s departure without having secured a clear way forward for the industry is bewildering.
With so much at stake, political tensions continue to simmer, each side fiercely intent on protecting and growing its interests. By March 2020 the European Central Bank (ECB) announced banks had agreed to move more than £1.2 trillion of assets from the UK to the eurozone, quadrupling their equity compared with 2017’s end. Misgivings have increased since, the FCA and the PRA suspicious about the ECB’s subsequent pressure on banks to add hundreds of extra staff and billions of additional capital to their operations in central Europe. The central bank has started a thorough review it aims to finish by early 2022 and, despite assurances from the ECB, the Bank of England is reported by the FT (paywall) to be concerned its strategy involves ‘hollowing out’ some of the big international banks’ UK-based operations. There’s no denying the major players have boosted their European presence, both in terms of capital, people and their business focus:
- JPMorgan Chase employed around 250 people in Paris pre-Brexit and expects to have 800 by the end of 2022
- Goldman Sachs has more than tripled its headcount
- Bank of America has increased employee numbers from 83 to 500
A pattern is emerging whereby financial hubs for different specialisms are being established in central Europe. “Now the smoke of Brexit is starting to clear, we see investment banks have ended up in Paris and Frankfurt… investment funds settled in Dublin and Luxembourg and the stock market has ended up in Amsterdam”, Dirk Shoenmaker, Professor of Banking and Finance at Rotterdam’s Erasmus University.
Various factors influence the willingness of professionals to leave the UK for jobs in Europe and, consequently, the volumes of people involved. Language, accessibility, schools and living costs all play a part. However, what’s clear is that the exodus has fallen fall far short of the bleakest projections. EY’s latest Brexit Tracker reveals activity was ‘muted’ over 2021. Numerous large investment banks that initially announced they’d move more staff to Europe once they lost access to the single market have since revised down the numbers. In fact, the total number of Brexit-related job relocations has subsequently fallen to just under 7,400 since 2016, down from 7,600 in December 2020.
To underpin the UK’s resilience and viability as a global financial centre and reinforce the benefits of its separation from Europe, in November 2021 Rishi Sunak disclosed new plans for financial regulation in the UK that will focus on growth and international competitiveness. He claimed the “once in a generation opportunity” would align the FCA and PRA’s prime goal of achieving financial stability with the aim of boosting growth. The EU’s regulatory systems have no such requirement. The resignation of Brexit Supremo Lord Frost before Christmas emphasised his frustration that, having split from Europe, the UK continued to pay heed to its judgments, “We can’t carry on as we were before, and if after Brexit all we do is import the European social model we will not succeed.”
By fully exploiting the UK’s liberation, Rishi Sunak believes “an open, green and technologically advanced financial services sector is achievable… One important part of that vision is ensuring, as an independent nation, that we have a coherent, agile and internationally respected approach to financial services regulation that is right for the UK.”
The latest report from the Global Financial Centres Index in September confirms that New York and London retain first and second spots despite 2021’s crises. Perhaps Sunak’s movement away from equivalence to a belief that the UK’s separation will be key to its success is well founded.