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Japan has issued a warning that its corporates could relocate from London to other cities if the UK’s Brexit negotiations aren’t concluded to its satisfaction. In Japan’s Message to the United Kingdom and Europe, Japan notes that its businesses have created more than 440 000 jobs across Europe, with half of direct investment flowing through the UK. Japanese companies like Nomura, Mitsubishi, Honda and Nissan have a strong presence in the UK. The Japanese government cites “uncertainty” as a major concern and urges the UK and the EU to ensure the Brexit process is free of surprises. Fears include that companies will be hit with extra tariffs in trade across Europe and that companies will suffer if EU nationals cannot travel freely between the UK and Europe. Until now, Brexiteers have underplayed the likelihood of London losing its status as the world’s financial capital. Japanese companies aren’t the only ones making noises about finding other homes for their headquarters and European staff. However Simeon Djankov, a global expert on financial markets, says there are significant reasons to expect London to continue to dominate European financial services. These include a legal system that protects creditors and shareholders, favourable tax treatment and a deep pool of professionals and graduates from which to draw. And, some industries like insurance are deeply entrenched in the UK. Nevertheless, expect some businesses to make good on threats and move elsewhere. But don’t expect the proverbial floodgates to open. London will continue to be the city of first choice for many, argues Djankov. – Jackie Cameron
Following the Brexit vote, the race to succeed London as Europe’s financial capital is on. “We know that groups based in the City are planning to leave for Dublin, Amsterdam, Frankfurt and Paris,” the French prime minister, Manuel Valls, told journalists soon after the UK’s referendum. Other countries in the European Union are also intent on stealing financial services jobs from the UK. Even the economy minister of Bulgaria, the EU’s poorest country, invited City of London escapees. In reality, however, London will remain Europe’s main financial centre.
There are three reasons for this continued dominance over European financial services:
- The pre-eminence of the British court system in upholding the rule of law, including the protection of creditor and shareholder rights.
- The superiority of the UK’s university education in economics and finance over its continental counterparts.
- The UK’s tax and employment regulation that is conducive to the industry’s health and profits.
Protecting the interests of creditors and shareholders from the rapacious behaviour of competitors or the state is obviously important for attracting financial services. On this score, the UK is ahead of the rest of Europe. The World Bank’s Doing Business project ranks the UK fourth in the world in shareholder protection, behind only Hong Kong, New Zealand and Singapore.
France is in 29th place when it comes to the strength of laws protecting shareholders, Germany is 49th. In terms of protecting creditor rights, the UK ranks 19th in the world, France 79th, and Germany 28th. Of course, the rule of law can improve in Europe so that financial investors feel equally well protected in Paris or Frankfurt. But this process will take years, perhaps decades.
In terms of education, markets increasingly require a sophisticated understanding of economics and finance, as well as in-depth knowledge of the legal architecture underlying financial services. Here, too, British universities lead Europe in offering quality education. In the latest Shanghai global ranking on economics education, there are six UK universities among the top 50 and only three continental European universities (one in the Netherlands and two in France). Four of the top five masters of finance programs in Europe are based in London (the only exception being INSEAD near Paris).
Last night met French CEO who has moved head office to London post-Brexit vote to avoid hostile French corporate taxation.
— James Bartholomew (@JGBartholomew) September 5, 2016
And in terms of tax and employment regulation, the financial services sector in the UK benefits from lower corporate tax rates and more flexible employment laws than Germany and France. In the World Bank’s Doing Business ranking on paying taxes, the UK is ranked 15th in the world, well ahead of Germany (ranked 72nd) and France (ranked 87th). The UK’s lead is even wider in terms of flexible labour regulation. The latter is especially important in the highly cyclical financial sector that annually hires and fires tens of thousands of white-collar professionals.
The finance industry has many fields within it, however, and some parts are viewed as more vulnerable to Brexit. One candidate is foreign exchange trading in the euro – a US$2 trillion-a-day market. Currently, more than 70% of euro trading takes place in London, compared with 11% in Paris and 7% in Frankfurt, according to Bank for International Settlements data. The European Central Bank has already tried banning clearing houses outside the eurozone from trading the euro. But in 2015, the EU’s highest court disagreed. Hence London’s vulnerability may be overplayed: Brexit does not alter the status quo as the UK has never been a member of the eurozone.
— Los Angeles Times (@latimes) September 4, 2016
Insurance is another sector that’s European activity is highly concentrated in London and where Brexit may hurt. But the UK’s main competitors are in Asia (Singapore and Tokyo) and the US. The access that London has to European money is based on proximity and historic relationships, not on being part of the EU. In short, even in insurance markets it is hard to see a rapid shift away from the City of London.
But Brexit may have a negative effect on London’s position as the world’s best-regulated financial centre. Following the uncertainty around its EU exit, Asian and American markets could take some business away from the City of London. The government’s knee-jerk reaction to this development may be to erode some of the UK’s financial regulation in an effort to attract more investment. Such a response would be unfortunate as London has attracted a lot of talent because it is a place for clean business practice. This possibility notwithstanding, London is unlikely to lose its crown as a global financial centre.
* Simeon Djankov is Executive Director of the Financial Markets Group, London School of Economics and Political Science. This article first appeared at The Conversation.
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