Location, location, relocation

Remember the EU Financial Transactions Tax (FTT)? Back in 2011, European Commission President Barroso presented a plan to make sure that financial institutions would “pay their fair share” following the bailouts which banks received in the wake of the financial crisis. Predictably, it led to an outcry with a small but vocal minority, led by the UK, intent on blocking its introduction. Having originally been intended to come into operation in 2014 it has yet to come into law – and probably now never will. Yet as recently as January, the EU Parliament suggested that a draft text could be ready by mid-2017. We are still waiting.

The irony is, of course, that many EU countries already had a form of FTT in place. Even the UK levies stamp duty on equity transactions, having done so since 1694. But with much of the evidence suggesting it would have an adverse effect on certain types of business, with derivatives transactions likely to be the worst hit, the push back was so great that it has been quietly kicked into the long grass. I have long held the suspicion that this would be the case, though when I made this point in a panel discussion in 2013, I was told I was wrong. Unfortunately, I will likely be proved right for the wrong reasons.

It is Brexit that has changed the nature of the debate. On the assumption that this will mean an end to financial services passporting, it is going to become a lot harder to conduct international financial services from London. With Paris and Frankfurt keen to attract business from the City, the chances of the FTT being introduced have gone below infinitesimally small. Although both the French and German governments continue to publicly support the principle of the FTT, it is hard to see either being very supportive at a time when they are scrabbling for London business. With Frankfurt apparently ahead in the business relocation race, the German government is unlikely to push the FTT high up the priority list. And without their support, the FTT is as good as dead in the water. This, of course, makes life rather more complicated for Britain, some of whose politicians assumed that the UK could continue to operate as a low-tax offshore haven.

Abandoning the FTT will certainly make it easier for firms to relocate to other EU locations. Indeed, some business lines simply might not have been profitable in the face of its introduction which could have resulted in them being cut altogether. Now, however, they may be able to continue operating elsewhere. However, abandoning the FTT alone is not going to be enough to persuade business to relocate. Given the pick of European cities to live, many bankers might opt for Paris. After all, it is sufficiently diverse to match the “charms” of London and is certainly one of Europe’s more beautiful large cities. But France is perceived as a more difficult place to do business than the UK and ranks 29th in the World Bank’s Ease of Doing Business index behind other EU members such as Poland and Portugal.

Anglophone bankers might have a preference for Dublin but Ireland may be reluctant to host some of the riskier parts of banking activity, following the problems which it has had to overcome in recent years. The Irish authorities would welcome asset managers, insurance companies and back office functions but may be more cautious about taking on big balance sheet risk given the relatively small size of the economy. It is thus partly due to the lack of alternatives elsewhere that Frankfurt has emerged as the front runner. Germany’s Ease of Doing Business ranking (17) is higher than Ireland (18) , although lower than the UK (7). Frankfurt is also home to the ECB and a well-defined financial cluster has been established in recent years.

One downside is that Frankfurt is relatively small compared to Paris and London, and is already operating at full capacity following the transfer of euro zone banking supervision to the ECB which has pushed up business and residential property prices. The latter in particular is not insurmountable. Anyone who travels 20 miles into central London on a daily basis will find they can do a longer commute rather faster and more cheaply than they can in south east England. Speaking from my own experience, I can testify that the quality of life is also rather better in the Rhein-Main region. If you like a beer, Germany is a good place to be, though if clubbing is your thing maybe you will find Frankfurt a bit tame.

From an industry perspective, however, the real concern is that the integrated European financial services sector will begin to fragment. London will remain the dominant player for some time to come but as business begins to relocate elsewhere it will be replicated on a smaller scale. It will be very difficult and highly costly to build the full infrastructure which the modern industry needs across a number of different European locations. Whilst Frankfurt will probably gain a lot of London business, my long-standing conviction remains that the centre of gravity will inexorably shift towards Asia. This trend may have happened anyway but will certainly be hastened by Brexit. Some politicians might cheer such an outcome for it will result in the de-risking of European financial services that the FTT was designed to achieve. But the British government may come to regret the dismantling of an industry which plays such a crucial role in the knowledge economy that it claims to support.