Practical analysis for investment professionals
01 July 2016

Winners of Brexit: Will London Be Supplanted by Other Finance Hubs?

As if to add insult to injury, England’s humiliating exit from UEFA Euro 2016 has sparked a fresh round of online ribbing about what is now dubbed Brexit 2.0. This even as reports continue to surge about market upheavals and projections of doom and gloom. Not surprisingly, the sentiment is especially bleak in the financial world.

Exactly one week after the historic referendum on 23 June 2016, we decided to look at the glass as half full rather than half empty.

Will London’s loss be another city’s gain?

We polled CFA Institute Financial NewsBrief readers to see which of six world financial centers stood to benefit the most over London from the United Kingdom’s withdrawal from the European Union (EU).

Which of the following global financial hubs stands to grow the most in influence and competitiveness as a result of Brexit?

Which of the following global financial hubs stands to grow the most in influence and competitiveness as a result of Brexit?

About 18% of the 1,175 respondents felt that London’s status as a leading center would remain unshaken. The converse, however, is that an overwhelming 82% were certain that Brexit would affect London adversely, and that some of London’s clout would be redirected to its competitors.

Almost half of those who clicked on the online survey — about 48% — plumped for proximity, placing their bet on Frankfurt. The other European city on the list, Zurich, pulled in only 6% of votes. About a sixth, or 16%, felt New York would benefit the most.

The rest of the votes were split among Singapore (3%), Hong Kong (3%), Tokyo (1%), and none of the choices (5%).

The poll was a simple one that didn’t delve into the specifics of where, how, and to what degree London would be affected. But there is no shortage of pundits and media reports offering a more detailed look. Interested readers should check out, among other content, commentary by the British politician Sajjad Karim on how “Brexit Will Destroy the City of London as We Know It,” and a report from the Financial Times, “What Will Brexit Mean for the City of London?

Here is a snapshot of how London might be compromised:

  • Forex: The city’s pole position as the world’s leading foreign exchange trading hub and principal euro trading center might be threatened. According to the Triennial Central Bank Survey last published in September 2013, the United Kingdom led daily average turnover volumes at 41% of global trade (or US$2.7 trillion), followed by the United States (19%), Singapore (5.7%), Japan (5.6%), and Hong Kong SAR (4.1%). The European Central Bank (ECB) has already attempted to mandate that clearing houses handling euro-denominated securities be located within the eurozone. While its last attempt in 2015 failed, if the ECB raises this again and succeeds, losing the euro business would deal a severe blow to London’s forex business.
  • Banking industry and jobs: Losing unfettered “passporting” access to the EU single market might prompt banks to relocate or divert operations and, as a consequence, jobs, to other parts of Europe.
  • Insurance: Again, as noted in the FT article, thus far European activity in this sector is concentrated overwhelmingly in London. However, losing special access to the EU market might divert business to Asian financial hubs such as Singapore and Tokyo.
  • Diversity and talent share: Some 2.2 million EU citizens work in the United Kingdom, and they make up 11% of the City’s 360,000 workers. Many might have to leave, especially if the UK immigration rules become more restrictive — a change called for by the Leave camp. There is almost no doubt that the United Kingdom would become less “international” and cosmopolitan as a result. The only question is by how much.
  • Regulatory influence: If the United Kingdom negotiates to retain access to EU markets, it might still be forced to comply with EU regulations, albeit stripped of any rights to influence them.

Interestingly, there are some who feel that contrary to what our poll suggests, London’s closest neighbors might stand to gain the least. The contagion effect of the political and economic instability caused by Brexit would almost certainly affect the eurozone markets, much more so than those in further regions.

And while the European centers are strong regional powerhouses, they are not true global financial hubs. Ian Harris of Z/Yen Group, a think tank and consultancy that publishes the Global Financial Centres Index (GFCI), notes in a recent commentary that Frankfurt’s population of about 700,000 is a far cry from London’s 8.6 million.

The GFCI, which ranked London top out of 86 cities in its most recent report in March 2016, groups factors for global financial hubs into five categories: business environment, financial sector development, infrastructure, human capital, and reputational and general factors.

Out of these, the two most important, according to thousands of professionals surveyed, are business environment and human capital. New York, Singapore, and Hong Kong — the next four in the rankings — all perform strongly in these categories and are London’s true competitors in the global game.

Harris has an intriguing theory that while New York might gain more in the medium term, it is the Asian financial centers like Hong Kong, Singapore, and Tokyo that will eventually rise the most, building on the significant gains they’ve accrued in the last 10 years of the rankings.

It’s the early days yet. When Article 50 of the Treaty of Lisbon is eventually invoked and the dust has settled, this will certainly be an issue worth revisiting.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Laurel Teo, CFA

Laurel Teo, CFA, was director of society advocacy engagement at CFA Institute. She worked with member societies in the Asia-Pacific region to advance awareness and adoption of CFA Institute ethics and standards, as well as policy positions on financial market integrity issues.

1 thought on “Winners of Brexit: Will London Be Supplanted by Other Finance Hubs?”

  1. Turgay Sanac says:

    By considering the emerging “ocean of Brexit issues” rather in terms of “the complexity science” instead of “the broadly applied linear analysis and a pure reductionism-driven approach”; the generally expected “huge catastrophic universal impacts” over the next decades might fail to appear. For instance, a redefinition of the UK foreign policy and trade relationships with the Commonwealth countries, in particular with India, could lead to an alleviation of the Brexit-induced damage to the global economy.

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