London still reigns among IFCs... but for how long?

One after another, the cards are falling into place as banks and other financial institutions now headquartered in London announce the destination of operations that must be moved out of the UK to remain within the EU after Brexit. 

There is a lot at stake. Financial services FDI in the UK totalled £10.2bn ($13.7bn) in 2015, according to trade association TheCityUK. Frankfurt and Dublin have been the big winners in the competition for some of that money, but Luxembourg, the Netherlands, Switzerland and France can each claim some success.

Frankfurt leads the race

Frankfurt has nailed down the European headquarters of Japanese banks Mizuho Financial, Sumitomo, Nomura and Daiwa Securities, along with Morgan Stanley, Citigroup and Standard Chartered. Several other banks have shifted some London-based work to the city. 

At least 19 global financial institutions have committed to set up or expand their operations in Ireland, including a dozen that moved operations from London. Bank of America and Barclays will establish their European hubs there, while some operations of JPMorgan, Citigroup, and TD Securities were among Dublin’s biggest catches. 

Amsterdam’s prizes include RBS and Mitsubishi UFJ Financial Group, while Paris has attracted HSBC, which will move some work to the French capital from the UK, and the global insurer Chubb. Proposed labour market and economic reforms have given Paris a boost when it comes to attracting financial services FDI. Luxembourg has attracted the EU headquarters of Northern Trust, among others, as well as several insurers including AIG and private equity firms.

Seeking the stable

According to the 2017 edition of Z/Yen Group’s Global Financial Centres Index report, a financial centre’s competitiveness is affected by its business environment, human capital, infrastructure, financial sector development, and whether the location has a reputation of being successful.

“The number one thing people look for is stability, then human capital and labour market flexibility, an educated population, and how easy and welcoming a place is for foreigners to live in,” says Mark Yeandle, the report’s author. 

Industry associations in many countries have drawn up elaborate presentations to outline how well their cities fit the bill, whether as a European headquarters or as a location for a specialised function.

Still, two years ago Oliver Wagner, managing director of the Frankfurt-based Association of Foreign Banks in Germany, could not have imagined the level of interest that foreign banks would have in his city, which houses Germany’s leading financial regulators – the Federal Financial Supervisory Authority (BaFin) – and the Bundesbank, the country’s central bank. The European Central Bank is also located there.

Mr Wagner says banks considering relocating to Frankfurt want to know how reliable the regulators are and whether they have the capacity to handle several bank applicants at a time. “Our regulators do have that capacity, and they are very experienced with risk models and risk management,” he says.

He adds that BaFin and the Bundesbank have collaborated to smooth the application process for foreign banks, including establishing parallel procedures and allowing many documents to be submitted in English. 

Mr Wagner says his organisation did not go out directly to recruit foreign banks. After Brexit, it offered to support its 200 members if their London headquarters or business entities were considering establishing or extending their existing businesses in Germany, as well as offering assistance in dealing with regulators. 

The work has paid off. As fDi went to press, 15 financial institutions had agreed to set up shop or broaden their activities in Frankfurt, according to Mr Wagner.

Irish smiling

Ireland also has much to brag about. It too is encouraging banks with an existing presence in the country – it plays host to 15 of the world’s top 20 – to expand their operations, while it is actively promoting its advantages to financial services firms.

Darren Maher, head of the financial institutions group at the Matheson law firm, says some banks’ first flurry of interest in Ireland was checked when they encountered the conditions set by Irish regulators. In particular, an Irish entity must have 'substance', meaning “the firms are adequately resourced and decision making takes place in the Irish entity”. 

Mr Maher thinks big banks and insurance companies now see these conditions as an advantage. “They respect the fact that Ireland has had a credible established financial services sector for years, so our regulator has done everything at least once and knows how to regulate,” he says. Ireland’s appeal is especially strong for the insurance sector, payment services and broker dealers, he notes. Investment banking is more limited because of concerns about manpower and capacity constraints.

Mr Maher believes many institutions are in wait-and-see mode. “A lot of banks are well into contingency planning, have made decisions or will do so in the next couple of months, and have picked a jurisdiction – but they don’t want to push the button until they know what is going to happen [with Brexit],” he says. 

“I don’t think you will see thousands of people moving out of London on day one,” he adds. “But over the course of the next five or 10 years, as people retire or resign, will they be replaced in London or in Dublin or elsewhere, where the cost of hiring may be cheaper? And in future, foreign banks that might have automatically chosen London will now look elsewhere.”

Still present

Still, experts say that while London’s appeal has been tarnished, a mass exodus from its financial sector is unlikely. Indeed, many institutions are retaining a significant presence in London, while moving some operations out – sometimes to multiple cities. For example, JPMorgan’s investment banking is heading for Frankfurt, its custody arm to Dublin, and its treasury services to Luxembourg. 

“No other city can take over all the services London provides for the financial sector,” says Mr Yeandle. London will retain many advantages, such as proximity to the European time zone, the English language, an investment currency, financial innovation, use of Eurobonds, major insurance markets, and an excellent and flexible workforce, he adds. Above all, it will remain a cosmopolitan city, and he says, “successful people like to live in a successful city”.