‘There isn’t a return. That bridge has been pulled up.’ That’s how Anne Finucane, Bank of America’s vice chair, described her firm’s relocation of its European headquarters from London to Dublin at a conference earlier this year.
Whatever Brexit we end up with – hard, soft or no Brexit at all – the decision of the UK to vote in favor of leaving the EU has led to a permanent redrawing of the financial services map in Europe. Put simply, London is on the losing end of the changes. Dozens of banks, investment companies and brokers have shifted staff and assets from the UK to centers in the EU. Dublin and Luxembourg have emerged as popular choices for asset managers, while global investment banks have spread operations across multiple cities.
But no great shift in power is expected. Rather, Brexit is ushering in a gentle rebalancing of responsibilities across the continent. At one stage, estimates put the number of finance jobs at risk in London at more than 100,000. Today’s guesses tend to fall far lower, usually somewhere between 5,000 and 10,000.
For IR teams, disruption so far has been minimal. Most of the staff movements relate to back-office roles. Portfolio managers, buy-side analysts and sell-side analysts are staying put – for the time being at least.
‘We see where people go to meet companies, we see where people change phone numbers, we see whether there is any geographical change and, in general, it’s been minimal,’ says Mark Robinson, head of EMEA issuer services for IR consultancy RD:IR. ‘The London-based guys are staying in London, the Paris-based guys are still in Paris. There’s not been a huge impact thus far. That’s not to say things won’t change depending on the degree of Brexit that we end up with.’
Many investment firms are moving their headquarters from London to the continent to retain valuable ‘passporting’ rights to sell services across the bloc. But portfolio managers can stay in the UK under a system known as delegation, which allows a fund to be listed in one country but managed from another, as long as an agreement exists between the two nations. At one stage it was feared European regulators could tighten this rule to poach business from London, which manages more than £1 tn worth of assets held by EU funds.
In February, however, UK and EU regulators signed an agreement stating that delegation can continue even in the event of a no-deal Brexit. ‘I think there is a reasonable amount of confidence that whatever happens, the relevant regulators have put laws and agreements in place to ensure a reasonable transition period,’ says Will Roxburgh, director at MJ Hudson, an asset management consultancy.
Click here to read about how issuers are responding to Brexit.
Investment in European securities
Whatever ultimately happens with Brexit, London may lose business through country-level rules that govern where investment managers can be based. For example, a number of pension funds have national rules that require the appointed asset manager to be in the EU. ‘It’s the case in many member states, but some may waive the requirement, at least for a short period, in the case of a no-deal Brexit,’ says Julie Patterson, a KPMG expert in asset management and regulatory change.
National rules can also affect the makeup of portfolios: some pension funds and investment firms are required to invest a certain percentage of assets in EU securities. With the UK leaving the EU, British companies could see a drop in investment from mainland Europe. ‘UK assets that may currently comprise a significant part of portfolios will no longer be EU assets, so portfolios will need to be adjusted,’ says Patterson.
For IR teams, another potential regulatory consequence of Brexit relates to trading. There are worries that EU investors will be barred from buying and selling certain shares in London. Where companies are listed or traded across EU and non-EU locations, EU funds are obliged to use the venue in the bloc, explains Christian Voigt, senior regulatory adviser at Fidessa, which provides trading software.
Under a hard Brexit, EU investors could be unable to trade many stocks in London, even though that’s often where the best price and deepest liquidity is found. Up to 230 companies may be affected, estimates Voigt. ‘But what we are talking about is the worst-case scenario,’ he says. ‘The two things that would have to happen [for that scenario] are a no-deal Brexit and the UK and EU not issuing mutual equivalence decisions.’
Equivalency is the system under which the EU grants foreign countries access to its financial markets. It allows this as long as the rules of the foreign country are deemed similar enough to those of the EU. The bloc already has a series of equivalency arrangements with countries such as the US, Singapore and Japan.
A bargaining chip
It’s expected that the UK and EU will grant each other equivalency status – after all, their markets currently operate under the same rules. But Voigt points out that it is only granted as part of a larger negotiation. ‘The EU is always very clear on using equivalency as a bargaining chip,’ he says. ‘Equivalence is something that is not obtained, but given. It is not a purely technical assessment. The decision will always have political considerations, too.’
The current negotiations between the EU and Switzerland over a bilateral treaty are illustrative. The two sides have been locked in talks for years without success and, to up the pressure on Switzerland, the EU recently threatened to remove its equivalency status. That would prevent EU funds from trading on the Swiss Stock Exchange, which would cause a big drop in revenues for the bourse.
‘If you look at the Swiss situation, no one is arguing that the Swiss exchange follows different rules – it’s a much wider debate,’ says Voigt. ‘What we shouldn’t forget is that from a politician’s perspective, financial services is just one of many industries to be concerned about. So what might not make sense to finance industry experts might make sense to a politician looking at the bigger picture.’
While the politicians debate the next steps, the financial markets continue to go about their business. Despite the uncertainty around Brexit, European companies continue to head to London in the same numbers to meet investors, says Robinson.
‘It’s all carrying on,’ he observes. ‘You don’t need to convince companies to come to London because, ultimately, it’s the biggest capital markets center in Europe, so people want to come here and [present] their company for further investment, and I think that will always continue. There may just be some additional hurdles for investors, depending on the deal we get.’
The future of listings in Europe
The exchange map of Europe has also seen an overhaul thanks to Brexit. Last year, the Irish Stock Exchange (ISE) sold itself to Euronext, with ISE chief executive Deirdre Somers saying it was time to ‘pivot’ toward Europe. Both parties hope the sale will cement Dublin’s position as a listing venue of choice for debt, funds and ETFs post-Brexit.
But a recent study highlights that the London Stock Exchange (LSE) is expected to remain the region’s dominant market for new listings. PwC conducted a survey of 400 business executives, asking where they would consider for an IPO in 2030 outside of their home market. Respondents name the LSE as the third-most desirable venue, behind only Nasdaq and the NYSE. Despite Brexit, London’s ‘resilience and liquidity’ mean it will remain a top IPO destination over the next decade, says PwC.
This article originally appeared in the Summer 2019 issue of IR Magazine.
