Why banks are Brexiting

U.K. Prime Minister Theresa May’s Jan. 17 speech provided some much desired clarity on how the U.K. will proceed with Brexit. However, firms in London’s financial district are still examining options for shifting operations elsewhere in the EU to ensure access to the single market. HSBC has moved a step further by announcing the relocation of staff responsible for generating around a fifth of its U.K.-based trading revenue to Paris. Although the move is Brexit-driven, it is actually part of a trend towards reducing U.K. banking assets that started years ago. According to a report published by the British Banking Association in 2015, total U.K. banking assets declined every year from 2011 to 2014.

Since the Brexit vote last June, several EU jurisdictions have made overtures to the international banks operating in the U.K.’s financial sector, including France. It is easy to understand why France would seek out these institutions given the highvalue services they provide along with well-paying jobs and significant tax revenue. However, it is mystifying why some international banks would seriously consider Paris, given France’s business climate that includes high taxation and regulation as well as rigid labour laws. In the case of financial services, French politicians of all stripes have shown levels of hostility that can only be described as extreme. The existing president, who introduced a financial transactions tax to French financial markets, has made no secret of his The Canary Wharf financial, shopping and business district in London, where some firms are examining options for shifting operations elsewhere in the EU. disdain of London’s financial district. His predecessor blamed financial market speculators for hunger and food riots in Africa.

Nevertheless, the HSBC announcement shows that banks are serious about Paris. Perhaps France does not seem so bad because the U.K. implemented policies damaging the business climate for financial services well before the Brexit vote and has signalled further adverse policies may be forthcoming. For example, in the post-crisis period, when financial institutions had to cope with a flood of new rules flowing out of Brussels, the U.K. added to the burden with additional rules of its own such as the Vickers Rule.

But taxation is where the U.K. has really gone over the top. A shakedown started with the introduction of a levy (a tax on certain balance sheet items) that was justified by the U.K. government based on public bailout costs incurred because of the financial crisis. The levy has been increased several times since. Starting in 2016, banks have also been subject to an eight-per-cent surtax on income on top of the corporate headline rate. The U.K. government talks about the importance of competitive tax rates, including in May’s Jan. 17 speech, but the silence on whether banks can look forward to more competitive rates is deafening.

Attracting talent has always been an integral factor in London’s success in global finance. In her speech, May certainly made the right noises on this front, noting that “We will continue to attract the brightest and the best to work or study in Britain — indeed openness to international talent must remain one of this country’s most distinctive assets,” before moving on to note the U.K. will control immigration from EU countries. But the rules surrounding non-EU immigration, such as caps on work visas, have been tightened in recent years. A minimum salary requirement for work visas was just introduced even for those who have worked in the U.K. for years. It is a reasonable expectation that restrictions on EU migrants will reduce the talent pool despite her comforting words. If the U.K. government proceeds with new populist measures that it has floated such as caps on executive compensation, this will only add to the difficulties.

The U.K. may or may not be successful in working out a deal with the EU on access for the provision of financial services. But in any case, London has a lot going for it as a global financial services powerhouse including its infrastructure, capacity to innovate and tenacity in pursuing new opportunities from around the world. However, its future success will be impeded as long as the U.K. government pursues policies that leave London with one hand tied behind its back. (if only within the context of provisional application) that CETA holds value on both sides of the Atlantic and is being actively used to benefit their economies.

Those who do choose to capitalize on CETA as early as possible will need to act quickly to put in place systems that ensure goods crossing the EU’s borders comply with CETA and that the necessary paperwork is correctly completed. Those systems and the business models that support them will also need to be sufficiently nimble to adapt to a rejection or modification of CETA as the agreement makes its way across the continent for national ratification.

There’s little question that CETA offers a great deal of opportunity for those engaged in trans-Atlantic trade. For many of Canada’s businesses, the seven-year negotiation period has been a long wait and they are eager to capitalize on the advantages CETA offers. But the best means of protecting that trade investment is to understand the political climate of the continent and ensure a supply chain can adapt if necessary.

The next month will offer a key vote that will set the stage for CETA to clear its final hurdle (or final 27 hurdles). Interested parties should keep a watchful eye.