London has long been one of the world’s financial hubs, but the easy access it has provided global banks to the rest of the European Union cemented its status. If Brexit sets up new barriers, London will become a far less attractive place to do business.
That scenario would cost banks and related companies in the U.K. almost £40 billion ($49 billion) in lost revenue and put 70,000 jobs at risk, according to consulting firm Oliver Wyman. Executives at Morgan Stanley, Citigroup, Deutsche Bank, JPMorgan Chase, and other banks have said they’ll have to move staff and operations out of the U.K. to service their EU clients if Britain is shut out of the 28-nation single market.
Will French bankers in London be sent home?
U.K. Prime Minister Theresa May has said she can’t guarantee the rights of EU citizens living in Britain without reciprocal agreements from her European counterparts. EU nationals who’ve lived in Britain for at least five years automatically have a right to live there permanently, and vice versa.
Central and Eastern European countries are particularly animated about ensuring that the rights of their citizens to work in the U.K. are protected after Britain formally leaves the EU, with some threatening to veto any deal that doesn’t allow for that.
There are about 3.2 million EU migrants living in Britain, according to the Office for National Statistics. The United Nations estimates that about 1.2 million people born in the U.K. live in another EU country.
What is passporting?
Under EU law, it is the right of any company authorized in one country of the European Economic Area—currently comprising the 28 EU states plus Iceland, Liechtenstein, and Norway—to sell products and services throughout the bloc, a $19 trillion integrated economy with more than 500 million citizens. That allows a global corporation to get by with only satellite offices in places such as Paris and Frankfurt, keeping the overwhelming bulk of its staff in London.
EEA membership comes at a price Prime Minister May isn’t prepared to pay: contributing to the EU budget and following its rules, including the free movement of workers, while having no voice in making them.
What do banks want?
The biggest item on global banks’ wish lists was to keep full passporting rights, but that’s now highly unlikely given the U.K. government’s hard line on taking control of its borders.
Barring that, the banks want time to adapt. They’ve pushed for a transition period that goes beyond the two years of Brexit negotiations. That would give them a chance to shift activities that must be moved to continental Europe and get all the regulatory approvals necessary. May has indicated the industry won’t get special treatment in the talks.
Will a rival EU city emerge to challenge London?
Frankfurt, Paris, and Dublin are all wooing banking talent from the U.K., but no European location quite matches London’s depth of markets and breadth of expertise. Privately, bank executives are concerned about regulators in other locales—they may struggle to cope with an influx of financial-services companies looking to set up shop.
While banks will move some operations to Europe to reassure clients in the region, they’re unlikely to coalesce in a single hub. Lenders could also ship jobs across the Atlantic if New York proves to be the only other genuine one-stop shop for business.