In a post-Brexit world, could Germany take the UK’s crown in gaining the status of the EU financial hub?
In the EU financial markets, experts predict that Frankfurt and Paris are the rising stars and the ones to benefit the most out of Brexit, while London could potentially suffer from the UK’s departure out of the EU.
Experts suggest there has been a “lack of focus” on the UK’s financial services sector during Brexit negotiations.
With challenges ahead, experts still believe that the strength of London as a financial centre with its history and scale cannot be dislodged.
Ankush Zutshi, vice president, corporate actions and securities processing, IHS Markit, says: “Brexit has provided the impetus for several global financial institutions to expand and set up in Frankfurt and other European financial centres to continue servicing their European clients and, given the substitution of passporting rights to the slightly unclear ‘equivalence’. They are well-positioned to tackle the Brexit challenge.”
Brexit woes for the UK?
The immediate effects of Brexit were felt on the first trading day of 2021 as nearly €6 billion of EU share dealing shifted away from the city to facilities in European capitals, according to a Financial Times report. It was further reported that business on London hubs for euro-denominated share trading, including Cboe Europe, Turquoise and Aquis Exchange, shifted to their new EU venues set up late last year to cater for the end of the Brexit transition.
Some industry participants suggested that although there has been a shift in trading Euro-denominated stocks onto EU platforms, the majority of staff at Aquis, Cboe, and Turquoise will remain in London.
Further along the line, with no equivalence granted for UK financial services, the longer-term effects of a no-deal Brexit will potentially be more significant. The European Commission’s EU-UK Trade and Cooperation Agreement, stated: “The agreement does not cover any decisions relating to equivalences for financial services.”
“Nor does it cover possible decisions pertaining to the adequacy of the UK’s data protection regime, or the assessment of its sanitary and phytosanitary regime for the purpose of listing it as a third country allowed to export food products to the EU. These are and will remain unilateral decisions of the EU and are not subject to negotiation.”
Industry expert and consultant Tony Freeman explains that the absence of equivalence is a problem but was anticipated.
He says: “Equivalence is a flaky, politically skewed process that most firms do not want to rely on. Its scope is also limited – it does not cover all business segments. Banks and investment managers have therefore created new EU entities to trade with clients and counterparties inside the EU27.”
In addition to the challenge around equivalence, experts are highlighting that the implications of Brexit could mean UK retail funds face a significant and immediate disadvantage compared to its EU competitors.
The implications of Brexit could mean UK retail funds face a “significant and immediate disadvantage” compared to its EU competitors, according to Patric Foley-Brickley, managing director of Maitland, a global advisory, administration and family office firm.
Indeed the UK will need to work extremely hard to remain competitive as Brexit puts the whole UK domiciled fund industry at significant risk in the medium to longer term, according to one industry participant.
For example, a funds management group wanting to market into the UK is more likely to pick Luxembourg or Dublin to access a wider spread of markets for distribution because a fund set up in Luxembourg or Dublin can be marketed into the UK and Europe whereas a fund set up in the UK will be marketed to UK investors.
“Once it is recognised that retail funds are not on the table, immediately the scope of the review is significantly reduced and the corresponding opportunity to ‘make the UK the domicile of choice’ is limited to alternative asset classes only,” says Foley-Brickley.
Meanwhile, it has been noted that other jurisdictions have a significant headstart on the UK in relation to having market recognition for vehicles that are most suitable for a particular alternative asset type. For example, Jersey and Guernsey for real estate and private equity structures and Cayman, Ireland, and Luxembourg for hedge funds.
With these challenges remaining, how will London continue to thrive after Brexit, and in the EU, what country could be the new star?
The rising stars
While a number of countries within the EU are able to benefit from Brexit, Frankfurt and Paris are the rising stars.
Gernot Wurzer, head of sales at CACEIS Bank S.A., Germany Branch, says: “Frankfurt, along with Paris and Luxembourg, has certainly benefited from Brexit, and a number of banks have also taken the major strategic decision to move their European headquarters to continental Europe. The decision by the ECB to establish its new headquarters in Germany, as well as the importance of the Frankfurt stock and derivatives, exchange underlined that Frankfurt belongs to the major financial hubs in Europe.”
Wurzer notes that the recently executed UK withdrawal from the EU is merely another reason why the importance of Frankfurt and other financial cities in Europe is continuing to increase.
Similarly, Britta Woernle, director, market advocacy, at Deutsche Bank Securities Services, says: “Post-Brexit we are seeing several EU financial centres which are Frankfurt, Paris, Amsterdam, Dublin and Luxembourg. Frankfurt and Paris are undoubtedly the two financial centres which have benefited the most from Brexit and this tendency is continuing.”
Frankfurt is the headquarters of the European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA), while Paris is the location of the European Securities Markets Authority (ESMA) and has become the place for the European Banking Authority (EBA) which was formerly located in London.
It has also been identified that many banks have moved staff and assets from London to Frankfurt as a result of Brexit including Citigroup, J.P. Morgan, Standard Chartered, Goldman Sachs and Morgan Stanley and this process has not yet finished.
“The Euro clearing repatriation from London to Frankfurt and Paris is pending given the equivalence decision granted by ESMA until mid-2022 for UK central counterparties (CCPs). Almost 60 applications for approval of new or expansion of existing legal entities have been submitted to the BaFin and several thousand new jobs have been created in Frankfurt,” comments Michael Bowder, market information and collateral/RFP Western Europe in Deutsche Bank’s Securities Services team.
Bowder says: “Frankfurt is providing a stable political and regulatory framework, a high degree of liability and low costs to financial institutions and their employees as well as an excellent infrastructure and quality of life.”
Frankfurt seems to be leading in terms of the number of financial institutions with more than 20 that have set up bases and shifted business there but there are more than 60 financial institutions that have applied to set up in Frankfurt and signed up with German regulator BaFin.
Many of them and some of the biggest ones have decided to make Frankfurt their new EU hub, and according to Zutshi, leading global financial institutions have moved billions of dollars of balance sheet assets (more than €300 billion) to Germany as per Bundesbank and this amount is projected to double by the start of this year as per many other publications.
It is also estimated that capital movement could be up to €1 trillion. A significant percentage of euro denominated interest-rate clearing has also moved to Frankfurt and projection is much more will come.
“A lot of trading in German bunds has also shifted to Frankfurt,” says Zutshi, “as per expert projections, till now thousands of financial services related jobs covering risk professionals and traders moved to Frankfurt and many of these might be Germans in London moving back to Germany. Many more are expected to move to Frankfurt and include mainly traders.”
However, it’s not all doom and gloom for London as industry participants believe that given the strength of London as a financial centre with its history and scale, it cannot be dislodged.
In December, TheCityUK found that London still has the strongest overall competitive offering for financial services considering its innovative ecosystem, access to talent and skills, enabling regulatory and legal environment and resilient business infrastructure.
“Despite early warnings of mass exodus and movement of businesses, the impact has been limited and the focus of financial institutions has been to ensure continuity of business after Brexit while making sure they adhere to the new regulatory environment.”
“There is still a flow of firms and increase of exposure to London as well and many new avenues such as fintech and green finance for it to spur growth in financial services,” says Zutshi.
Sven Ludwig, senior advisor, governance, risk and compliance at ifb group, affirms: “London is a global financial centre and the financial centre in Europe. The continental European financial centres competed against each other instead of teaming up and forming a joint proposition.”
Ludwig concludes: “Yes, Frankfurt and the other traditional centres gained assets, but all are far away from stepping into a successor role.”
“In these discussions, we tend to forget the dynamic in the fintech space. Here, Berlin is the winner. If we think about a reshaping of the financial ecosystem in Europe, then Berlin is the rising star.
