K&K GLOBAL CONSULTING RESEARCH
SHOULD I STAY OR SHOULD I GO?
Financial services firms considering the distribution of staff from London across the European Union, will be pondering the dilemma the Clash asked in their 1982 hit song ‘Should I stay or should I go now?’
Kristian Karppi, Managing Director of K&K Global Consulting
Looking at the news over the last few months, it seems like the British decision to trigger Article 50 will most likely result in an opportunity for other European capitals to attract financial services firms across the European Union (“EU”) over the next five years. To date, K&K Global Consulting (K&KGC) has not seen any British authorities or associations responding with any substantial counter arguments, except the prospect of potentially reducing corporation tax, so it would become even more attractive for financial services firms to retain their business within the UK post Brexit. The true monetary outcome for the UK based on their Brexit decision, beyond self-governance and autonomy, will be realised over a much longer period given the speculative divided expectations about the survival of the European Union and the common currency.
The first and most obvious post-referendum move in the United Kingdom is that banks relying on European Union passporting rights based on their London presence will lose such passport access to the single market post Brexit. A number of significant banks have already publicly announced that they will move a proportion of their staff from London to other European capitals. To illustrate the potential balance of power, Jamie Dimon, CEO, JP Morgan (source Bloomberg 11th July 2017) believes that the EU authorities will over time have the power to determine to what extent the banks need to move their operations from London to the European Union.
While the world is watching the implications of Brexit, the once Swedish state-owned bank Nordea have decided to move their HQ out of Sweden to Finland to avoid the new costly Swedish regulatory requirements imposed by their national government. Nordea has reportedly predicted significant cost savings by moving their headquarters to Finland under the supervision of the European Central Bank (ECB). K&KGC finds it noteworthy that national politicians and regulators within the EU, with low levels of entry and exit, must place higher emphasis on harmonisation or they will face public humiliation by losing out on business to the disadvantage of the voting population.
While the UK Financial Conduct Authority (FCA) continue to increase their oversight of the UK asset management firms, the French, German, Irish, Luxembourg and Spanish authorities and buy-side associations are preparing to seize the opportunity by making it easier for UK based buy-side firms to relocate to their countries. Increasing the pressure on Asset Management firms that evaluate if they should keep their head office in London, ESMA released on the 13th July 2017 “OPINION to support supervisory convergence in the area of investment management in the context of the United Kingdom withdrawing from the European Union” with recommendations on how national authorities within the EU should prevent AIFMD and UCITS asset management firms from just implementing non-substantial shell companies within the EU in order to gain a passport.
Looking at recent articles from the Financial Times and the Independent, most buy-side firms who have already confirmed they will transfer London staff have named Dublin and Luxembourg as their future EU base. Considering the use of English as a business language, personal taxation of staff and less restrictive labour laws, we predict that Dublin is most likely to attract firms transferring staff to varying degrees out of London.
On the 13th July 2017, ESMA published the “OPINION to support supervisory convergence in the area of secondary markets in the context of the United Kingdom withdrawing from the European Union” which suggests that national authorities should prevent regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs) from only establishing shell companies within the EU to gain passport rights.
Future centralised supervision and enforcement by the European Securities and Markets Authority (“ESMA”)
A recent news article in the Financial Times (19th September 2017), suggests that the European Commission is proposing to give EMSA central supervisory powers over the EU member states regulators to enforce harmonised financial regulation and prevent regulatory arbitrage between the EU countries. The UK objected such proposals already back in 2012 before the British referendum.
There are always two sides to every story - one can only make theoretical assumptions based on current trends but the parameters dictating these trends are likely to change over time.
Stay tuned, more to follow…