LONDON—In the streets of the City of London, the heart of Britain’s global financial hub, it’s difficult to find someone who voted to leave the European Union.
The financial industry has for decades grown—and grown rich—from being the gateway to the EU for banks, brokerages and fund managers from around the world. That has helped it become one of the few truly global financial centers in the world, rivaled perhaps only by New York.
Losing that access could mean thousands of jobs are moved away in coming months and, in the longer-run, a steady decline.
“Brexit will result in years of uncertainty,” Jamie Dimon, chief executive of U.S. banking giant JPMorgan Chase, had warned before the vote, using the moniker for a British exit from the EU. The CEO of bank HSBC, Stuart Gulliver, had said as early as February that 1,000 jobs would have to move to Paris to better serve clients on the mainland. Executives like him will be meeting with their management teams and boards in the days to come to assess their businesses’ options.
At the heart of the matter is a principle called “passporting,” which currently allows any firm registered in one EU country to operate in any other member state without facing another layer of regulation. It’s the same principle that allows exporters to ship their goods to any EU country free of tariffs. Losing that freedom is a particular concern for the many foreign firms who use London not only as a financial hub but as an entry point into the EU.
Some 60 percent of all European headquarters of non-EU firms are based in the U.K., according to TheCityUK, which lobbies on behalf of the financial industry. The U.K. hosts more headquarters of non-EU firms than Germany, France, Switzerland and the Netherlands put together.
“I can treat a customer in France or Germany or Italy exactly the same way I can treat a customer in Birmingham. That is extremely rare,” said Phillip Souta, head of U.K. public policy at the global law firm of Clifford Chance.
Meanwhile, trillions in securities denominated in euros—such as short-term funding in euros for banks as well as more complex financial products—are traded in London, even though it is not part of the euro, the EU’s official currency so far adopted by 19 of the 28 members. As part of the EU, there have been no tariffs on trades and money flows from eurozone countries. That could change with Britain’s exit from the EU. The European Central Bank has reportedly been interested in bringing that trading to Frankfurt, Germany, where it is based and regulates banking for the eurozone.
While the U.K. could probably negotiate a new arrangement for trade in goods, it would be much more complicated to hammer out a deal on services, Angus Armstrong, chief of macroeconomics at the National Institute of Economic and Social Research has said. The situation has no precedent—no country the size of the U.K. has ever left such an integrated economic union, which with its 500 million people is the world’s biggest economic bloc. So the outcome of any talks can’t be predicted.
“Services are much more difficult,” Armstrong said. “That’s where it comes down to regulations and agreements. That’s how people discriminate and protect their markets.”
London has several structural advantages that would make it hard to leave.
In addition to having a trusted legal system and institutions that operate in English, the language of international finance, London is in the right time zone to access most of the Earth during its working day and has a reputation for delivering top-notch financial services. The industry is surrounded by an ecosystem of expertise—lawyers, accountants and consultants—to support it.
It also tends to have less red tape and lower taxes than countries like France, where the city of Paris has already said it would like to attract business away from London. And it is simply larger and more multinational than Frankfurt, Germany, which serves as the financial hub for Germany and hosts the eurozone’s central bank.
London’s financial sector has complained about a number of EU rules, such as limits on bankers’ bonuses and an attempt to impose a tax on financial transactions.
Megan Greene, chief economist at Manulife Asset Management, says the impact on London’s financial hub will depend on what new trade relationship Britain sets up with the remaining 27 EU countries.
The best case scenario would be a relationship like that of non-EU member Norway, where the country and the financial sector retain complete access to the EU market. But that is unlikely as Britain would also have to accept EU rules and allow entry to EU migrants, something the winning campaign for the “leave” vote had been adamantly against.
It’s more likely, Greene says, that Britain will use the model of Turkey or Switzerland, which would limit access to the rest of the bloc.
“This means that financial services firms will probably shift their headquarters to an EU country so they have access to the EU,” she said.
And anything that curtails Britain’s financial industry has implications for the U.K. economy as a whole, not just the bankers who were pilloried for taking home million-pound bonuses while they fueled the global financial crisis.
TheCityUK notes that the sector supports the economy by providing financing for businesses, overseeing retirement savings, providing mortgages and making insurance payments. Related professional services include legal, accounting and management consulting firms.
The financial sector accounts for 11.8 percent of economic output and employs 2.2 million people, or 7 percent of the nation’s workforce, according to TheCityUK.
The industry’s importance is even more obvious in Britain’s trade figures. While the country posted an overall trade deficit of 34.4 billion pounds ($50 billion) in 2014, it generated a 72 billion pound surplus from exporting financial and related services.
“I don’t think people quite understand what goes on in the City,” said Vicky Pryce, an economist and former joint head of the U.K. government economic service. “A strong financial sector employs a lot of people and is vital for the health of the economy.”
