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Jamie Dimon, the outspoken JPMorgan chief executive, could not be clearer about the upheaval he thinks the City of London would suffer outside the EU.
Speaking to the Financial Times, Mr Dimon warns of a “massive dislocation” to the financial hub that would reverse decades of growth for international banks in London and scatter them across Europe and the rest of the world.
He fears that UK-based banks would no longer be able to sell services throughout the bloc if Britain left the EU. His own bank would scale down its London operations and set up elsewhere: “If we can’t passport out of London, we’ll have to set up different operations in Europe.”
This is far from the first time that the City has heard such prophesies. For veterans such as André Villeneuve, former chairman of the London International Financial Futures and Options Exchange, the debate about whether Brexit would spell riches or ruin brings back memories of late-1990s warnings that ultimately proved groundless. “They said the City would die because the UK wasn’t part of the euro,” Mr Villeneuve recalls. “They said Frankfurt would be king. But none of that happened.” Instead, the City prospered, weathering not just life outside the euro but also the global financial crisis.
The question ahead of the UK’s June 23 In/Out EU referendum is whether the warnings today are as unfounded as those a decade and a half ago. It is an issue that splits the City — and sometimes individual groups — into two, pitting brokers and hedge fund executives aghast at the wave of post-crisis EU regulation against investment bankers keen to commandeer European markets from a London base. Smaller groups and the people who have spent their lives working in them are much more likely to want to leave; bigger, international institutions overwhelmingly favour remaining in the bloc.
“A significant amount of financial trade currently booked in London would leave if the UK left the EU,” says Alex Wilmot-Sitwell, head of the European arm of Bank of America Merrill Lynch. “It wouldn’t happen overnight but, steadily, it would fragment throughout the EU.”
Backers of Brexit counter that the City would continue to thrive if it was unshackled from Brussels bureaucracy. “Outside of Europe, we wouldn’t suffer European regulation,” says Howard Shore, executive chairman of Shore Capital Group, a broker specialising in smaller companies. “We would be able to liberalise our economy, set our framework and rules to suit us.”
Since financial services represent up to a tenth of the UK’s gross domestic product, the outcome is of vital importance to the country as a whole. Rivals and competitors are hungry to take business from the City. Prominent among them are New York, long vying with London to be the world’s leading financial centre; Frankfurt and Dublin, with eyes for European business; and Singapore, Hong Kong and Tokyo, which have made big advances on western financial centres.
Some financial professionals worry that Brexit would weaken not just the City but the EU financial sector as a whole. No other European financial centre comes close to London. The fear is that if banks and other financial groups moved services elsewhere in the continent it would lead to fragmentation rather than consolidation, ultimately strengthening the City’s Asian rivals. “Everyone loses if the UK leaves the EU,” says Gunter Dunkel, chief executive of German bank NordLB. “Frankfurt might win some business from London, but a more fragmented Europe would be a weaker Europe in the world.”
It is impossible to calculate the precise impact of Brexit on the market access that the City prizes or on the regulations it loathes. No clarity exists over the terms of a UK exit from the EU.
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But it is relatively straightforward to identify industry sector that have prospered at least in part because of access to the EU single market. The City has built on its traditional strength in foreign currency trading to become the biggest centre for trading the euro. Global investment banks have in tandem boosted their operations in London. Insurance, another longstanding speciality, has also thrived, with many insurers using London as their base for the EU as a whole. New markets have opened up: the UK manages €1tn of net assets in cross-border funds, or Ucits — double the figure of five or six years ago.
Meanwhile, the contours of the debate reflect the changes in the financial sector itself. As the City has become more international, increasingly dominated by foreign investment banks and with more foreign employees, its focus has shifted from the UK economy to Europe and beyond. Today, 11 per cent of City employees — more than 38,000 people — come from EU countries other than the UK. US banks have built up £999.6bn of assets in the country, often to serve the single market.
For virtually all of the big banks, insurers, asset managers and ancillary professions who together account for most of the City’s workers, the financial centre’s role as a bridge to continental European business is vital. A large majority in the City backs the view that Brexit would be a huge own goal; bankers, in particular, tend to be ardently pro-EU. Goldman Sachs has paid $500,000 to the campaign to stay in the bloc, with other big US banks following its lead.
But there is another City tribe, smaller but more vocal, fighting passionately against EU membership. Much of the hedge fund industry and the brokers who service the UK share Mr Shore’s conviction that Brexit would make them, and the broader economy, better off. “Europe doesn’t have a great love for the City — the French and Germans have always been jealous of its success,” says Crispin Odey, founder of hedge fund Odey Asset Management. “Europe turns us into a colony and we are used to an empire. We are not used to obeying rules we haven’t set.”
Many hedge funds are relatively small and are focused on money raised both domestically and from outside the EU, making easy access to the bloc of limited value. Top of their hate list is the Alternative Investment Fund Managers Directive, which establishes new regulations that many complain are costly, onerous and bureaucratic.
Brokers complain about Mifid 2, a sweeping new European regulation intended to make financial markets more transparent by “unbundling” the research and trading fees that brokers charge their asset management clients. Such grievances tap into a more general resentment of the EU’s limit on bonuses, which is so overwhelmingly unpopular in the City that it could trump more general worries about stability.
“Brexit would be a risk factor”, says Michael Spencer, chief executive of interdealer broker Icap, who has not yet decided how to vote. “But it could also free us from the ridiculous bonus caps and other new legislation.” Others point out that the City would retain many benefits: the UK timezone, English law and education. “You can’t replicate the skillsets that you have in London,” says Neil Woodford, the star fund manager who has set up his own firm, Woodford Investment Management.
EU supporters reply the UK would need to be governed by the bloc’s rules if it wanted to retain access to its market. They add, that at present Britain is able to police many such rules itself; David Cameron, prime minister, obtained a level of reassurance at last week’s summit that such autonomy would remain.
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“If we were out [of the EU],” adds Bill O’Neill, head of the UK investment office at UBS Wealth Management, “our ability to influence policy would be significantly reduced.” Lord Hill, the British member of the European Commission for financial regulation, is pushing for a “capital markets union” to make corporate fundraising easier, cheaper and without recourse to local banks — a big opportunity for the UK, Europe’s principal financial centre.
Mr Villeneuve remembers that the UK’s decision not to participate in the euro in 1999 resulted in only one real setback: the loss of Bund futures contracts to Frankfurt.
But, he argues, if Britain left the bloc, it would be impossible to limit damage in such a way. “We’d be a supplicant on the outside,” says Mr Villeneuve. While he has heard the warnings before, he argues that this time would be different.
For all the changes the City has gone through in recent decades — deregulation, internationalisation, the opening up of new markets — Brexit could represent the biggest upheaval yet.