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Brexit Uncertainty: London’s status as global financial center under threat
London has, for many years, been one of the world’s major financial centers. Some would even argue that it is the world’s financial center. Banks from all over the globe have offices there, many of which take advantage of the EU’s passporting system to sell their services across the Union. However, as the threat of a rough (or no) trade deal for the UK becomes an increasingly likely prospect, many banks are looking to move their European headquarters out of the City or at least relocate large numbers of staff to cities such as Berlin, Dublin, and Frankfurt.
The UK is Europe’s biggest investment banking market thanks to London’s status as one of the world’s major financial hubs. Achieving such a status has been aided by passports, but that system is in jeopardy if the UK leaves the EU as per its referendum result. Passports, which were introduced in 1993, give UK banks, insurers and asset managers the right to sell their services freely across the rest of the EU and give firms based in Europe access to the UK. Many companies from the US, Asia and elsewhere have based their European operations in the City and rely on passports to access the rest of the EU.
As with almost anything Brexit-related, the future of the UK’s trade agreements is in limbo and nobody knows what will happen. This means that the future of passporting is also extremely uncertain and this has banks spooked. A cryptic tweet from Goldman Sachs CEO Lloyd Blankfein last week suggests that his bank may be moving significant resource from London to Frankfurt and a number of other banks, including the UK’s own Lloyd’s Banking Group, have made similar noises.
The UK needs to resolve the trade agreement issue swiftly and preferably in its favor so that the future of passporting is clear. This seems unlikely given the level of disagreement within even government about how best to proceed in negotiations. Until passporting’s future status in the UK is resolved, speculation will remain rife and the longer the uncertainty drags on, the more likely it is that banks will relocate so as to avoid needing to do so hastily in the event that passporting will not be allowed under the agreement eventually reached. This would see the jewel in the UK’s economic crown removed and lead to a possible ‘brain drain’.