London still best suited to serve as Europe’s financial centre
• As Brexit jostling begins, cities such as Amsterdam, Paris and Frankfurt are no match
Since Britain voted to leave the EU, analysts have debated the City’s fate. In 2016, the British financial services sector employed more than a million people (3.1% of all UK jobs) and contributed about 7.2% of the UK’s total gross value added. Just more than half of this came from London.
Any threat to the sector — and to London’s place as arguably the leading global financial centre — would be a major blow.
Fortunately for the UK, Brexit itself will not erode the significant advantages London enjoys. Perhaps more importantly, neither will it help European rivals build up similar advantages.
It’s easy to see why cities such as Paris and Frankfurt — or Amsterdam, often mentioned as a compromise candidate — imagine they can steal business from London. For one thing, all overlap with Asian and US markets during the trading day.
London largely depends on transaction flow from European markets, British and European multinationals, international fund managers, insurers and global currency and derivatives trading.
It also benefits from transactions completed elsewhere, which flow through key exchanges or markets.
LCH Clearnet, owned by the London Stock Exchange, clears more than 50% of interest-rate swaps across all currencies. London clears 97% of dollar interest-rate swaps and 75% of those in euros.
There is no inherent reason why that business could not shift elsewhere. But London has some unique advantages over its competitors. English is the lingua franca of international finance. English law governs the bulk of international transactions and English courts are particularly well-regarded.
Institutions such as the Bank of England command great confidence. Low taxes, reliable corporate laws and regulations that have historically been responsive to evolving industry needs all add to London’s financial power.
London benefits from network effects, where similar businesses and supporting services such as lawyers, accountants and consultants are located in close proximity to each other. Good infrastructure, technology and telecommunications as well as convenient transport links are key advantages.
Even more important is access to a skilled labour force with the relevant expertise. London has historically treated foreign workers generously, especially in the financial services industry, although Brexit could make hiring European bankers more difficult.
GLOBAL NETWORKS
It is difficult to see Frankfurt, Paris or Amsterdam accommodating an English-speaking, English-law financial culture.
Developing the infrastructure and networks needed to sustain a global financial centre will take time, regardless of French President Emmanuel Macron’s invitation for foreigners to move to Paris.
Neither Paris nor Frankfurt has a global trading culture, which evolved in London and Amsterdam over centuries of trading in goods and services.
An aggrieved EU is obviously keen to use Brexit to diminish London’s much-resented financial dominance.
The debate about euro clearing is an example. Given that the UK was never part of the euro zone, there’s no reason it cannot continue to act as a clearing house. Nothing stops the relevant firms from agreeing to abide by EU laws and directives, supported by UK legislation.
London-based financial companies can access European customers by complying with common market rules under equivalent regulation provisions, or they can do so by establishing or using existing European entities.
Indeed, at a deeper level, the debate over London’s future as a financial centre is perverse. Markets are global. Advances in technology and communications make location largely irrelevant. Most transactions are concluded electronically.
People routinely work remotely and transactions are completed between companies and individuals who may never meet one another, other than electronically.
The companies that dominate the UK financial services industry are mostly foreign and many of the transactions have little to do with Britain. Transactions are frequently not even recorded in London, but booked elsewhere. Many functions are no longer performed in London, but have migrated to other parts of the UK or further afield in order to save money.
The reality is that financial centres are creatures of tradition, habit and comfort. The concentration of financial firms in a small number of cities is driven by social connections and proximity of people in related fields, as well as factors important to highly paid financiers, such as reasonable personal income tax rates and an acceptance of large bonuses.
The perfect mix includes lifestyle issues that affect families, such as housing, education and health — not to mention reasonable divorce laws, given the prevalence of break-ups. Inevitably, a tolerance for masters of the universe — and those huge bonuses — is helpful.
These conditions are not easily replicated. London may or may not continue in its historical role as a major financial centre. But its competitive advantages are substantial — and they will not be easily eroded, even by a hard Brexit.
GIVEN THAT THE UK WAS NEVER PART OF THE EURO ZONE, THERE IS NO REASON IT CANNOT CONTINUE AS CLEARING HOUSE