A “hard” Brexit with the absence of a free trade agreement with the EU will have “substantial negative effects” on the City, according to new LSE research.
In an analysis carried out by Simeon Djankov, executive director of the Financial Markets Group at LSE, he concludes that among the most affected financial services will be banking, followed by market infrastructure, asset management and insurance and reinsurance services. He adds that the uncertainty surrounding the transition from the EU is a major deterrent to new business in the City.
Experts have already estimated that up to 100,000 City jobs could be lost. Dr Djankov’s discussion paper The City of London after Brexit analyses the latest developments in different subsectors:
- Banking Around £25 billion in revenues come from EU-related banking business, or 23 per cent of total retail and business banking. Banks reliant on EU markets will experience an increase in their operation costs dictated by reorganisation and possible need to open subsidiaries in the EU. As a result smaller banking institutions may consider leaving the City. So far, only one international bank, the Russian bank VTB has publicly announced the possible move of its European operations entirely away from London. Several have announced deep staff cuts in their City operations, such as HSBC which is moving 1,000 jobs to France.
- Insurance and Reinsurance Around £4 billion of insurance and reinsurance sector revenues, or ten per cent of the total, are from EU-related business. But because 75 per cent of insurance and reinsurance services are provided through subsidiaries, about a quarter of these revenues, or £1 billion, may be lost to competitors due to Brexit.
- Asset Management Around £6 billion, or 25 per cent of UK asset management revenues, comes from EU-related business that will be directly affected by Brexit. UK-based asset managers may need to set up subsidiaries across Europe to continue to manage investment funds domiciled there in an efficient manner. As a result, investment activities may become more expensive and complexfor clients. About a third to half of this EU-related business, £2–3 billion, may look for a new home.US private equity funds Blackstone and Carlyle have announced plans to establish passporting rights in Luxembourg to retain the ability to do business in the EU after Brexit. Morgan Stanley and Aberdeen Asset Management are exploring options for new headquarters in the EU. So far these decisions do not spell out the number of jobs transferred away from London.
- Clearing Transactions Fragmentation of clearing functions across countries may increase costs for both UK and non-UK clients because of rising inefficiencies. About half of the business in this sector—£6 billion—may be lost to competitors.
- Spillover Effects The secondary effects of Brexit could be broader than those described in these four subsectors, but they will emerge over time. This is because the strong interconnectedness between the financial services sector and subsectors such as accounting, auditing, legal services, management consultancy, real estate, and other professional business services can serve as a centripetal force in keeping business in the City of London, even at increased costs. Auxiliary legal, accounting, business advisory, advertising, and office management services account for 46 percent of intermediate inputs for banking and asset management services, and 32 percent of intermediate inputs in insurance and reinsurance. Thus the rough effect on auxiliary service revenues is about £8 billion (46 percent of £17 billion in banking, asset management, and clearing services plus 32 percent of £1 billion in insurance and reinsurance revenues.
Dr Djankov concludes: “Brexit will have negative effects for the City of London. The analysis here presents preliminary results to suggest that such effects will be substantial. The UK government’s reaction to leaving the single market may be to revisit some of its financial regulation in an effort to bring more investment. But such a policy move may trigger a regulatory race with other major financial markets, to the detriment of the global financial system. In the meantime, uncertainty surrounding the transition from the European Union and the possible changes in the regulatory stance of the UK government will be deterrents to new business.”