Banking: Focus shifting to second wave of Brexit

“There’s a huge focus on that first step,” JPMorgan chief Jamie Dimon said at a recent conference in Paris, referring to the initial movement of bank staff out of London to the other 27 EU member states in preparation for Brexit.

However, that focus is changing. With little clarity on the terms of impending Brexit, political turbulence across the EU only beginning to subside and some regulatory uncertainty in potential relocation areas, the difficulties of planning cost-efficient relocations are still imposing.

The frontrunners in the battle for Brexit business are well known – Paris, Frankfurt and Dublin are getting the most attention – but each has many drawbacks, and indeed moving business to any of them entails not just one-off costs, but likely increased permanent costs related to fragmentation.

Alex Howard-Keyes, investment banking partner at consultancy Alderbrooke, says: “The sheer cost of fragmentation will amount to a hell of a lot of money. It impedes coordination, communication and creates significant operational expense.” Frankfurt’s announcement that officials there, including Thomas Schäfer, the finance minister for the state of Hessen, intend to relax rigid employment laws in a bid to draw business from the City of London might not be as welcome as those officials thought.

And in Paris, memories of François Hollande as president have many bankers sceptical of that city’s future as a finance hub.

Frankfurt, where banks such as Nomura, Daiwa and Sumitomo Mitsui Financial Group are planning EU-headquarters – Goldman Sachs and JPMorgan are planning to add to existing staff there as well – has highly restrictive employment laws that make it difficult not only to hire externally but to make staff redundant.

That’s something the city has said publicly it wants to address after Germany’s September elections by creating a “risk-taker” exemption in which senior staffers can be made more quickly redundant.

Under German law, bonuses are included in the calculation that determines redundancy packages, and employers usually have to abide by strict and often onerous notice periods that relate to seniority and length of employment. That can make letting go highly paid bankers a slow and expensive process. 

Frankfurt-specific – or for the state of Hessen as a whole – reform could change that, but then there’s the fact senior bankers might not love the idea of being more easily fired.

And it might not be possible to get an exemption: the change would need to be made at the national level. Germany’s labour ministry is headed up by Social Democrats, whose platform is closely associated with workers’ rights and unions.

As for France, no one knows how long Emmanuel Macron’s young presidency will last, or its third-pillar approach.

Regardless of whether he succeeds in getting parliamentary approval to push through labour law reform via executive decree, bypassing the debate stage even though he has sufficient backing, his government will need to at least have a strong legacy for a substantial amount of time to gain the confidence of businesses.

There will surely be some in the country upset that such a large change be passed without representative debate. And, as HSBC’s CEO Stuart Gulliver notes, Hollande’s presidency – one in which he essentially declared war on the banking industry – only ended this year.

“You’re going to consider whether or not that package of reforms will stay,” says Gulliver. “Will that environment in terms of, partly, labour laws actually stick through at least two presidential cycles?”

This enthusiasm for business reform – coming off the heels of widespread populist movements in the west whose anger is directed largely at the elite – could well curdle in the face of another economic downturn or a prolonged bad press stemming from, say, lawsuits against banks.

It might seem a little too much too soon to start pushing these kinds of reforms on populaces that only recently appear to have backed away from populist movements. Marine Le Pen lost out in the election, but that doesn’t mean the sentiment that fuelled her campaign has dissipated.

“The French taxpayer is probably not too enthusiastic about being on the stump in the way London is,” says Alderbrooke’s Howard-Keyes.

Maybe, maybe not: it’s untested. France used little public money to prop up its system, and even made money, according to European Central Bank figures. Germany spent much more money on its financial sector and the public is still intensely angry about it. As Howard-Keyes puts it: “Germans aren’t so in love with Anglo-Saxon finance.”

At any rate, a choice must be made, and in each case it will come down to moving as few resources as needed. In the meantime, you can expect cities such as Frankfurt and Paris to devise as many ways as they can to attract business.

However, it might well be that banks decide, once in Paris or Frankfurt or wherever, that the water is indeed warm and begin sending other resources to those locations.

On the other hand, even if the water’s frigid, the EU might push you in. Back to JPMorgan's Dimon.

“There’s a huge focus on that first step,” he says. “There’s going to be a second step. I think people should focus more on the second step.”

To date, headlines about how many finance and finance-related jobs will be moved out of the City have been largely exaggerated. The terms of Brexit are, infamously, unclear, but banks planning for the worst are yet only moving what they think they will absolutely have to.

HSBC stated at the same June conference as Dimon that the 1,000 jobs the bank announced would be moving to Paris is a “worst-case scenario”, for example – hardly the initial tremors of a seismic shift in the bank’s structure.

“Once you have that first step,” says Dimon of the first phase of bank moves to other EU cities, “if the EU determines over time that they want to move a lot more jobs out of London into the EU, they could dictate that. The regulators could dictate it and the politicians could dictate it.”

JPMorgan employs some 16,000 people in the UK, with 75% of them serving EU-based companies, he says. That dynamic plays to the EU’s advantage.

“We will simply be subject to what they do down the road,” he says.