Financial Times

Frankfurt takes early lead in Brexit race to poach City jobs

by James Shotter in Frankfurt and Laura Noonan and Martin Arnold, Financial Times

March 21, 2017 | 9:46 am
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Frankfurt is emerging as the early front-runner in the race between rival financial centres to win jobs from London ahead of Britain’s departure from the EU.

With Theresa May, UK prime minister, activating the Article 50 divorce clause this month, bankers and officials across Europe say the City of London will lose business to multiple locations with different specialisations.

But the German city appears to have the early edge over competitors such as Dublin, Paris, Amsterdam, Madrid and Milan, according to Financial Times interviews of more than 30 senior financiers and officials.

“Over long periods of time activity moves to the centre of gravity, and the location of the European Central Bank in Frankfurt is an example of this,” says John McFarlane, chairman of both Barclays and TheCityUK lobby group.

“The Germans are so far ahead [that] the French can’t quite believe it,” adds a senior banker involved in his institution’s planning.

The FT interviewees expect London to remain Europe’s pre-eminent financial centre. But as well as highlighting potential gains for Frankfurt, they say that Luxembourg could pick up jobs in asset management and insurance while Warsaw looks to benefit from another wave of outsourcing as banks move back-office jobs to low-cost jurisdictions.

Many also argue that, rather than moving UK activities elsewhere in Europe, banks may shift resources to the US to benefit from tax and regulatory changes promised by President Donald Trump – or, alternatively, to Hong Kong and Singapore to take advantage of economic growth in Asia.

THE BIG PLAYERS

Frankfurt:Pro: Could benefit from banks choosing to be close to the ECBCon: Lacks the flair of Paris

Paris:Pro: Much the most aggressive campaign, offers cultural attractionsCon: May struggle with France’s reputation for hostility towards finance

Dublin:Pro: Similar legal system to UK, also shares language and timezoneCon: Lack of infrastructure and regulatory capacity

Even before Britain’s vote last year to leave the EU, some banks were shifting resources from Europe back to the more profitable US market.

Richie Boucher, chief executive of Bank of Ireland, says: “As far as investment banking is concerned, the presumption that it is a competition between London and another European centre has a degree of naivety. It’ll be between London and New York.”

However, many of the big banks’ trading operations are coalescing around Frankfurt and, with Article 50 activated, many institutions are likely to make final decisions about shifting activities in the next three months, according to people involved.

Michael Raffan, London-based head of the global financial services group at Freshfields Bruckhaus Deringer, says that while the big US banks want to move as little as possible, all are assuming a worst-case scenario.

A report by Oliver Wyman, a consultancy, said in October that London could lose up to 75,000 jobs in financial and related services, while an EY study in November put the figure as high as 232,000 for the UK as a whole.

“The clustering of financial services in London is hugely efficient for all of Europe,” Jamie Dimon, chief executive and chairman of JPMorgan Chase, told Bloomberg TV this month. “Now you’re going to have a de-clustering, which creates huge duplicative cost which is expensive to clients. We have no choice. That is what we have to do and try to figure out the best way to do it.”

Frankfurt out in front

Shared language and a large existing business in Germany make Frankfurt one of the favoured destinations of UBS, people familiar with the Swiss bank’s decision-making process say.

The German city has also made the shortlist for Morgan Stanley, JPMorgan and Bank of America Merrill Lynch, although people familiar with those banks’ plans say their operations are likely to be scattered across a number of EU countries. Goldman Sachs already has an operation in Frankfurt.

“We have had more than an indication from three of the big five US banks, as well as from one Swiss, one Japanese, one Korean and one Indian bank that they have either already decided in favour of Frankfurt or are in the process of doing so,” says Hubertus Väth, who is spearheading the city’s lobbying effort and who expects it to attract 10,000 financial jobs during the next five years. “I think we are in pole position.”

At present, bank bosses are discussing far smaller shifts in personnel. They may have to move more staff later if clients desert London, or if banks are not able to find a solution that enables them to do business in the city and book it through an EU entity – a procedure known as “back to back”.

Thomas Schäfer, the finance minister of Hessen, the German state in which Frankfurt is located, says the greater fragmentation of the industry across Europe could play to the EU’s advantage.

“If all the jobs went to one country, then the countries that weren’t benefiting wouldn’t see this as an important part of the Brexit negotiations,” he says. “But if lots of us profit, then there is a better chance of presenting a united front on this point and making sure we get a good deal from the UK.”

Dublin sets out its wares

Dublin had high hopes of tempting business from London as soon as the UK voted last year to leave the EU. The Irish capital already has a large European lending operation for Citi and a trading business for Credit Suisse, which is expected to move more trading jobs from London. Other institutions considering moving assets or activities to the city include Bank of America, Royal Bank of Scotland, Barclays and Morgan Stanley.

Ireland is also rapidly attracting more investment funds, with the value of funds administered in Dublin jumping from €500bn in 2003 to €3.8tn last September, making the city the third-largest centre for investment funds globally after the US and Luxembourg. But it is not yet attracting as much interest from the insurance industry as was anticipated last year, when its language, culture and legal system were seen as big draws for relocations from London.

Eoghan Murphy, the country’s junior finance minister, recently said Ireland had complained to Brussels about “creeping regulatory arbitrage” as other cities were “being very aggressive in trying to win business”.

Both Frankfurt and Dublin have weaknesses. German labour rules are often seen as rigid – although officials are considering changes to remove certain protections for high earners – while Dublin’s size means it lacks housing and regulatory capacity.

LOW-KEY CONTENDERS

Luxembourg:Pro: A government that styles itself as the only country that still loves bankersCon: Its tiny size would soon cause capacity issues

Amsterdam:Pro: Good transport links and English is widely spoken Con: Its financial sector is small and has a draconian bonus cap

Warsaw:Pro: Cheap and well-educated labour forceCon: Unlikely to attract many front office jobs

The two cities are mentioned as alternative locations by Japanese banks and brokerages – some of the financial groups most affected by Britain’s decision to leave the EU – but seldom with much enthusiasm. Instead, Japanese bankers and advisers say Amsterdam is high on their institutions’ shortlists, partly because of the Dutch city’s flight connections, its focus on trade and its inhabitants’ knowledge of English. Some Japanese banks already have subsidiaries in the city.

Paris’s high octane campaign – and the battle for back offices

The most aggressive campaign to win business from London has been waged by Paris. French ministers have been deployed to woo the large international banks; tax rules have been changed in favour of foreign workers; and advertising campaigns have been launched.

But Stuart Gulliver, chief executive of HSBC, last month played down his bank’s plan to move 1,000 staff to Paris, one of the city’s-high profile successes, saying that half were French people who would be returning home. “Within one to two years, the City of London will have completely replaced the jobs that will have moved,” he says. “The City will still be the dominant financial centre in this timezone.”

Other cities are looking for business in a lower-key fashion. Officials in Luxembourg say the grand duchy is as much a complementary financial centre to London as it is a competitor. “We are not positioning, the Luxembourg financial centre as dragging business out of London,” says Robert Scharfe, chief executive of the Luxembourg Stock Exchange.

Nevertheless, AIG and M&G, the asset arm of Prudential, are bulking up operations in Luxembourg while Lloyd’s, the London-based insurance market, is believed to favour one of the Benelux countries for establishing a new EU subsidiary. It is due to announce its decision by the end of the month.

Italy is seeking to tempt financial and other professionals to Milan with hefty tax breaks. Berlin and Stockholm are trying to challenge London’s place as a global hub for financial technology, or fintech, companies by playing on their fears that Brexit could make it harder to hire the best people from around the world if they stay in the UK.

Meanwhile, many big banks have outsourced their back office and IT operations to Warsaw, leading Mateusz Morawiecki, Poland’s deputy prime minister, to forecast that Poland will create 35,000 jobs in business services this year.

Additional reporting by Michael Stothard in Paris, Jim Brunsden in Brussels, Vincent Boland in Dublin, Ben McLannahan in New York, Oliver Ralph and Zosia Wasik in London, Rachel Sanderson in Milan and Leo Lewis in Tokyo

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by James Shotter in Frankfurt and Laura Noonan and Martin Arnold, Financial Times

March 21, 2017 | 9:46 am
  |     |     |   Start Conversation

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