16 Dec 2019
The U.K. capital’s financial center cheered Boris Johnson’s emphatic election victory for alleviating the Brexit uncertainty that has hung over the British economy’s key engine for 3½ years.
Banks and financial firms have been preparing for a disruptive Brexit, collectively spending billions of pounds to protect themselves, while also suffering revenue and margin declines as their customers hoarded cash and held back on investments.
London’s status as Europe’s only truly global financial center came under threat as cities including Frankfurt, Paris and Amsterdam vied to attract firms and talent from the U.K. capital. But the City, as London’s financial center is known, has weathered the uncertainty, relying on its cosmopolitan atmosphere and critical mass of workers and companies as a bulwark. So far, the exodus of financial workers that many predicted after the U.K. voted to exit from the European Union has been more of a trickle.
On Friday, the City’s mood was one of relief after Mr. Johnson’s Conservatives quashed a challenge by the opposition Labour Party, led by Jeremy Corbyn. The victory gave the party the parliamentary majority needed to pass Mr. Johnson’s Brexit deal before the end of next month.
“It is a vote for clarity and action after a long period of uncertainty,’’ said William Jackson, managing partner of London-based private-equity firm Bridgepoint Group, which manages about $22 billion of assets. “Whatever your view, it now provides a business environment in which intelligent investment decisions can be taken.”
For months, bankers have complained that investors and companies have been on the sidelines, waiting for a Brexit resolution. One senior banker on Friday said he expects U.K. deal activity to pick up, with investors plowing more heavily into some assets given the renewed confidence.
But the banker said he thinks the euphoria will be short-lived, given the lack of an agreement with the European Union on financial services, and added he is bracing for the “slow decline in the U.K. compared to the EU.”
A potential recession and interest-rate cut in the country, which many analysts expect, would add to pressure on bank earnings and stock prices.
Under the latest Brexit deal secured by Mr. Johnson, banks will lose their ability as soon as the end of next year to “passport” into the EU to sell services or set up branches in the bloc.
After that, financial-services firms would have to work under a principle known as equivalence, a piecemeal approach allowing market access if the rules of a third country pass muster with Brussels regulators. But equivalence can be revoked by the EU at any time, and a framework for it still needs to be created to cover various financial activities.
Overall, Mr. Johnson’s vision is seen as embracing low-regulation, free-trade and finance-friendly policies, in contrast with Mr. Corbyn’s agenda to raise taxes on companies and the ultrawealthy.
The clarity brought by the result comes after years of work undertaken by banks, insurers and asset managers to prepare for a life post-Brexit. They hired lawyers, consultants and lobbyists to figure out where their staff and client business would have to be based.
Banks have typically each spent between $100 million and $500 million on Brexit planning, according to company filings, public statements and people familiar with the matter. Some spent as much as half of their Brexit costs on consultants.
Over the past few years, financial-services firms have picked new cities on the continent to conduct their business from and funnel resources, applying for broker-dealer licenses or creating new entities. That activity has boosted locations including Frankfurt, Dublin, Amsterdam, Paris, Zurich and Luxembourg.
Yet most firms had been waiting for firmer guidance before sending more employees to new locations. Consulting firm Ernst & Young LLP predicts that around 7,000 financial-services jobs could ultimately move, along with around £1 trillion ($1.3 trillion) worth of assets. The firm says around 1,000 jobs at the investment banks it monitors have moved. The number of potential moves still pales compared with the number of finance and insurance employees in Greater London, which totaled more than 400,000 as of June, according to the Office for National Statistics.
Bank of America Corp. has spent $400 million preparing for a possible no-deal Brexit, moving its European legal headquarters and more than 100 people from London to Dublin, on top of relocating 300 people to a new investment-banking hub in Paris. The bank has no plans to bring people back if the U.K. leaves with a ratified agreement, said a person familiar with the matter. Bank of America now sees some benefit in having more bankers on the ground in continental Europe, where it is easier for them to meet clients.
By Julie Steinberg, Simon Clark and Margot Patrick, The Wall Street Journal, 13 December 2019
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