Could London Ever Remain The Financial Centre of The World After Brexit?

In September 2016, the Global Financial Centres Index 20 (GFCI 20) published its latest report, stating that London, New York, Singapore and Hong Kong are currently leading financial centres. In this report, London was ranked as the financial centre of the world, one point ahead of New York, with the remark that if the UK were to leave European Union, London’s place may change. In the post-Brexit period, the financial world has been shaken by the loss of confidence towards London. Uncertainties about the future of the UK’s economic relations triggered the speculations and concerns of economists over the question of London losing its position in the financial world. Old rivals such as Paris, Frankfurt, and Amsterdam immediately started planning to capture the finance companies that are likely to be transported completely or partially outside of London as well as welcoming escapees from this market. Nevertheless, is it really the case that London will simply lose its place as the financial centre of the world?

Brexit results show that significant social cleavages in the UK played an important role in the configuration of the final decision. Leave and Remain votes are distributed according to divisions of the society through class, education and geography. One of the implications of these divisions is that most of the people working in finance, insurance, and foreign exchange trading and similar sectors voted against Brexit. The finance industry and insurance sectors are the main fields of concerns, which is not trivial. For example, many banks already think even though London hosts more than 70% of Euro trading, if it leaves the EU, it will not be able to clear Euro dominated swaps and a big crisis will emerge. Repercussions of these concerns have already started to be seen with the slowdown in financial sector recruitments. However, more serious problems might be expected due to uncertainty of the UK’s EU exit. It is most likely that, whether the UK decides to completely sever its partnership with EU at the end of the negotiations or not, the UK may lose its dominant position in the meantime because of flowing speculations of its economic capacity and reliability, while other states are working to substitute London as the financial centre.

However, there is a strong argument on the other side that London will never lose its dominance among the world financial centres. Simeon Djankov from LSE argues there are three fundamental reasons for that. First, the UK has a very well-organized and functioning legal system protecting the creditor and shareholder against threats coming from competitors and the state. So people have no reason to hesitate investing into this market. His second argument relies on the superiority of UK’s education in finance and economics departments. London and other cities of the UK have the best schools of economy and finance, especially in graduate studies; so they have a comparative advantage of profession at hand which is more likely to cause better long term effects than the first. The third factor is a call for trust and confidence in the UK’s market and finance sectors that the UK’s lower corporate tax rates and flexible employment laws give opportunities for the industry work effectively.

To sum up, the UK has a combination of uniquely established market mechanisms for being the financial centre of the world, which prevent it from being completely vulnerable to the effects of Brexit. However, it is important to watch the current process: whether London will remain as the world’s financial centre after post-Brexit negotiations. What if one of its rivals replace it silently, or will we see the proliferation of finance industry different than it used to be?

 

Ellyatt, Holly. “UK Sees Slump in Finance Sector Recruitment following Brexit Vote.” CNBC. September 23, 2016. Accessed November 9, 2016. http://www.cnbc.com/2016/09/23/uk-sees-slump-in-finance-sector-recruitment-following-brexit-vote.html.

Djankov, Simeon. “Why London Won’t Lose Its Crown as Europe’s Financial Capital.” The Conversation. August 30, 2016. Accessed November 9, 2016. https://theconversation.com/why-london-wont-lose-its-crown-as-europes-financial-capital-63362.

Finch, Gavin, and John Detrixhe. “Banks Said to Plan for Loss of Euro Clearing After Brexit.” Bloomberg. September 22, 2016. Accessed November 10, 2016. http://www.bloomberg.com/news/articles/2016-09-21/global-banks-said-to-plan-for-loss-of-euro-clearing-after-brexit.

Yeandle, Mark, and Michael Mainelli. “The Global Financial Centres Index 20.” September 2016. Accessed November 2016. http://www.longfinance.net/images/gfci/20/GFCI20_26Sep2016.pdf.

 

Merve Keskin

 

 

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