The UK voted in favour of leaving the European Union (EU) in a June 2016 referendum – nearly 3 years ago. On Tuesday (13 March), UK Prime Minister Theresa May’s EU withdrawal deal was rejected for a second time by an overwhelming majority of British MPs (they voted down the deal by a 149 margin). MPs will next vote on whether the UK should leave the EU without a deal and, if that fails, whether Brexit should be delayed.
With D-Day (29 March) fast approaching and no solution in sight, we highlight self-described capital market think tank, New Financial’s report entitled Brexit & the City – the impact so far, which was released on Monday (11 March) and looks at the possible long-term economic consequences of Brexit for the UK. Reuters describes the report as “one of the most detailed yet on the impact of Brexit on financial services,” noting that it found that Dublin (Ireland) alone accounted for 100 relocations from the UK (a clear winner among the European capitals), ahead of Luxembourg with 60, Paris 41, Frankfurt 40, and Amsterdam 32. Half of the asset management firms impacted (including Goldman Sachs Investment Management, Morgan Stanley Investment Management and Vanguard), had chosen Dublin, followed by Luxembourg, which has attracted firms such as Schroders, JP Morgan Wealth Management and Aviva Investors.
Before looking at New Financial’s findings, we highlight the economic impact on the UK identified thus far:
According to the UK Office for National Statistics data, four consecutive declining quarters of business investment saw 2018 record the lowest annual growth rate of the UK economy since the 2009 global financial crisis (GFC) and a December slump in output of 0.4%.
A UK government report released in November 2018, entitled EU Exit Long-term economic analysis concluded that the UK economy will be worse off in the next 15 years after Brexit vs a scenario where it remained part of the EU.
Gertjan Vlieghe, an independent economist on the Bank of England’s (BoE’s) nine-member monetary policy committee (MPC), calculates Brexit’s cost to the British economy as running at GBP40bn p.a. Vlieghe says since the vote, the UK economy lost c. 2% of GDP vs a scenario where there had been no significant domestic economic events.
Since the 2016 referendum, the UK’s economic growth has also slowed, while the rest of the world has recorded one of its strongest periods for growth of the past decade.
The BoE has calculated that the cumulative total of lost UK GDP since 23 June 2016 is GBP55bn.
Business investment in Britain has also been stuck at c. zero, with a 3.7% YoY drop in 2018, despite an upswing worth c. 6% p.a. in the rest of the Group of Seven (G7) countries.
Below, we highlight some of the main findings in New Financial’s research report:
Various sectors’ responses have been different – 50% of asset managers, hedge funds and private equity firms in its sample group chose moves to Dublin, c. 90% of all firms moving to Frankfurt are banks, two-thirds of those going to Amsterdam are trading platforms or brokers and Paris is “carving out a niche for markets and trading operations” of banks and attracting a broad spectrum of firms.
5,000 expected staff moves, or local hires, were identified by the firm – a number which is expected to rise in the next few years.
New Financial writes that a better measure of Brexit’s impact is “the scale of assets and funds being transferred”. It found that 10 large banks and investment banks together moved GBP800bn of assets from the UK (c. 10% of banking assets in the country and, according to the report, a “conservative” estimate), while insurance firms moved tens of billions of assets, and asset managers transferred GBP65bn-plus.
A small number of insurers and funds have also moved a combined GBP35bn in assets, while a handful of asset managers moved a total of GBP65bn in funds.
New Financial identifies 275 firms (banking and finance) that have relocated part of their business or set up new EU entities. Among these, c. 250 are setting up new hubs for their EU business, and 210-plu have set up new entities or applied for new licences.
While the report notes that London is likely to remain Europe’s dominant financial centre for the foreseeable future (companies prefer to keep as much of their business in London as possible and even the largest relocations represent a maximum of 10% of the headcount at individual firms), over time other European cities “will chip away” at London’s lead.
William Wright, founder and managing director of New Financial, says a 10% shift in banking and finance activity would cut UK tax receipts by c. 1%, while relocations have cost firms $3bn-$4bn, which will be passed on to customers and shareholders.
New Financial believes the impact of Brexit is far bigger than it had initially expected, with the firm writing “ … we think the report understates the full picture.” It added that many companies will have moved parts of their staff or businesses quietly, other firms will have held off making a formal move, with some companies not being ready as yet. Nevertheless, the report does acknowledge that contingency planning by banks, exchanges and asset managers, combined with recent agreements between UK and EU regulators, means the industry is “… well-prepared for whatever happens between now and 29 March.”
In conclusion, it states that “the damage is done”, indicating that for many banks and financial businesses, Brexit “effectively happened some time last year.” The political uncertainty since the referendum has also forced companies to make the assumption of a worst-case scenario – a ‘no-deal’ Brexit with no transition period, and they have thus prepared accordingly.