HEADING FOR THE BREXIT

LONDON IS LOSING ITS STATUS WITH FINANCIAL FIRMS AS DIVORCE FROM EU NEARS

The United Kingdom has been at the centre of the global economy for centuries, and London has long held the distinction of being the pre-eminent financial hub for Europe.

But more than a year after Britons shocked the world by voting to break away from the European Union, the future for companies in the U.K. when this messy divorce is (or is not) finalized remains hazy.

In the meantime, TD Securities has gone through “the different stages of grief ... around Brexit,” said Peter Walker, its vicechair and regional head of Europe and AsiaPacific. “I think it was initially denial, and now we’ve moved on to acceptance … And now we’re just trying to plan it, and be a bit cold and calculating about it, relatively,” Walker said in a recent interview at TD’s London office, where the bank has nearly 300 employees.

TD Securities on Tuesday said it would be expanding its Dublin office and plans to establish a bond-trading business there — a move that positions the bank well for continued access to the EU no matter what happens.

Many global companies with a footprint in the U.K. have been grappling with the same tough decision: stay put or move to protect their access to the EU in the event their current ability to conduct business, as well as hire European nationals, seamlessly across the 28-member trading bloc becomes compromised postBrexit.

The Bank of England this month said the resulting uncertainty is starting to affect companies’ business and investment decisions, prompting it to hold interest rates steady and cut its economic growth forecasts for 2017 and 2018.

U.K. Prime Minister Theresa May’s government this week published a series of papers outlining its position on issues such as the transfer of goods and services in a bid to provide some clarity. Instead, it sowed more confusion by largely asking for many of the same advantages the U.K. enjoys under the European single market system.

Some companies, such as TD Bank, Canada’s largest lender by assets, aren’t waiting for Brexit negotiations — set to head into their third round in Brussels next week — to produce more clarity before taking action.

TD is only the latest global financial firm to choose Dublin as its post-Brexit EU hub, joining 15 others that have announced their intentions to set up or expand their operations in Ireland due to Brexit in the first half of 2017, according to IDA Ireland, which promotes foreign direct investment into the country.

The list includes JPMorgan Chase Co., which bought a new office in Dublin, and Bank of America Corp., which will use the Irish capital as its preferred location for its principal legal entities, IDA Ireland said.

Dublin and Frankfurt have become the apparent front-runners as alternative destinations in a post-Brexit world, a top member at Germany’s central bank told Der Spiegel magazine this week. The Deutsche Bundesbank is in talks with 20 major banks that are eyeing Frankfurt as their new EU hub, said Andreas Dombret, who handles banking and financial supervision.

In a so-called hard Brexit, one of many scenarios that may come to pass by the March 2019 deadline, companies registered in the U.K. would lose their “passporting” rights to seamlessly do business with EU members.

In that eventuality, the toll on London’s financial sector could be staggering. The U.K.’s Financial Conduct Authority in a letter to the Treasury in August last year said 5,476 U.K.-registered companies use passporting to do business elsewhere in the EU.

Bill Downe, chief executive of the Bank of Montreal, which has BMO Capital Markets offices in London, Dublin, Paris and Zurich in Europe, recently said that much of the market execution around payment and settlement will continue to be concentrated in London, but sales forces may be more dispersed.

“The hope is that the U.K. will stay in a free-trade zone with Europe, and the movement of people from the U.K. to Europe and Europe to the U.K. will continue,” he said in a recent interview at a BMO office in London. “But if it doesn’t, then there will be adjustments that will happen.”

Financial firms are particularly vulnerable, which is why the Bank of England in April called on hundreds of them, including insurers and fund managers, to submit Brexit contingency plans in July as the central bank plans for “all eventualities.”

The Bank has received the “latest and comprehensive” contingency plans, but Governor Mark Carney’s confidence in a smooth exit of the U.K. from the EU is waning. On Aug. 3, the Bank of England held interest rates steady and cut its economic growth forecasts for 2017 and 2018 to 1.7 per cent and 1.6 per cent, respectively.

Carney, a former Bank of Canada governor, told reporters the outcome of the Brexit negotiation is the most important factor determining the U.K.’s economic fate, but the uncertainty surrounding it is already showing up in the data. He said investment has been weaker than expected in what is generally a very strong world economy.

“It’s evident that uncertainties about the eventual relationship are weighing on the decisions of some businesses,” he said at a press conference on Aug. 3. “Distilled down from the 1,000 businesses in our decision-maker panel, which is run by our agents, about 40 per cent of those businesses are affected in some way, either through the supply chain or end markets by uncertainties around Brexit.”

The U.K.’s Office of National Statistics on Thursday said the economy grew 0.3 per cent in the second quarter, after 0.2 per cent in the first, the lowest growth for any major advanced economy since the start of 2017, according to Reuters, which also reported flat business investment and little growth in household spending.

But as financial firms ponder whether to move or expand an existing subsidiary outside the U.K., as TD Securities intends to do, non-financial companies say this chaos presents an opportunity since they may be able to capitalize on other global companies scrambling to shift their resources and people out of the U.K. or take advantage of other dynamics at play.

“Some of our clients, particularly our financial clients, are looking for us to support their Brexit plans,” Paul Tremble, the U.K. strategic growth director for Montreal-based professional services and engineering firm WSP Global Inc., said in an interview in London. “They don’t quite know where they might need space, how much space, but we’re certainly actively working with two very major global financial institutions to help plan that out. And looking for opportunities to do so.”

Nadeem Syed, chief executive of U.K.based Finastra, the newly formed megafintech that absorbed Toronto-based DH Corp., said Brexit creates a tailwind rather than a headwind.

Companies needing to set up shop elsewhere could boost business for Finastra, a fintech and financial software company created after U.S. investment firm Vista Equity Partners purchased DH Corp. and merged it with London-based financial software provider Misys.

“If Brexit forces customers to set up alternative infrastructure outside of the U.K., it requires them to spend on infrastructure and technology, which essentially helps us,” Syed said in an interview in Toronto in July.

However, any exodus of financial firms from London will have other ripple effects.

Alain Carrier, the Canada Pension Plan Investment Board’s senior managing director and head of both international and Europe, said Brexit introduces “some question marks as it relates to real estate.”

CPPIB is among the world’s biggest investors in U.K. real estate, and has $18.7 billion in various investment assets in the country, according to its 2017 annual report.

“If banks were to move employees in large numbers, central London real estate would probably suffer,” Carrier said in a recent interview in London. “We have to assess all this in context.”

Caisse de dépôt et placement du Québec’s chief executive echoed a similar sentiment in June.

Michael Sabia told Reuters that the Quebec pension fund, which owns highend office buildings in London and is the third-largest shareholder of Heathrow Airport, is holding off on making more major real estate investments in the U.K. capital.

London was high on Caisse’s priority cities for investment, but the fund turned cautious after Prime Minister May lost her parliamentary majority in her snap election gamble in June, weakening her ability to negotiate the U.K.’s exit from the EU.

Valuations of its high-end real estate assets were not yet impacted, but lessdesirable properties have been, he added.

“The question is how far does this go, does it spread? That is why we’re being careful until we have a better sense,” Sabia told Reuters.

Brexit uncertainty has not impacted CPPIB’s mandate, but it has weakened the U.K. pound, Carrier said.

“That makes a number of opportunities on a relative basis potentially still very attractive … So we’ve continued to invest in the U.K. and we are still continuing to look at opportunities in the U.K.,” he said.

The pound fell to its lowest level against the euro since 2009 on Wednesday as a survey of more than 600 U.K. employers by London-based Recruitment & Employment Confederation (REC) showed deteriorating confidence, with 31 per cent expecting the economy to worsen.

“Businesses are continuing to hire to meet demand, but issues like access to labour, Brexit negotiations and political uncertainty are creating nervousness,” Kevin Green, REC’s chief executive, said in a statement upon the release of its survey.

“Employers in the construction sector are especially concerned as they rely heavily on EU workers to meet the growing demand for housing and to support the government’s infrastructure plans.”

European nationals are a key source of talent for many Canadian firms as well.

“We have significant number of them here, we rely on them, because we run frankly our business across Europe from London,” Carrier said. “We rely on Germans, French and others. And we rely on the ability to continue to hire them.”

WSP Global has been actively lobbying industry bodies to “make sure our voice is heard clearly in government” on this issue, Tremble said.

“Even a year on from the referendum, it’s not entirely clear how it is shaping up,” he said. “And I think we need to continue to support our people ... giving them the confidence that they’re a key part of our business and we’re going to fight for them.”