Reports of the City of London's demise after Brexit may have been greatly exaggerated. This is the key message from the big new report on the impact of Brexit on Britain's financial services sector.
Written by consulting firm Oliver Wyman on behalf of campaigning organization TheCityUK, it provides the best snapshot yet into banks' thinking on Brexit and was expected to confirm the gloomiest prognoses banking job cuts and offshoring. It some ways it does, but it also suggests that even after a hard Brexit, the very vast majority of jobs in the City of London will be unaffected.
In the worst case 'hard Brexit' scenario, where the UK has no preferential access to EU financial markets and is operating on WTO rules only, Oliver Wyman thinks 31,000 to 35,000 jobs could be directly at risk and that a further 34,000 to 40,000 jobs could disappear from London due to second order effects (like increased costs, which result in entire business lines being shifted overseas).
This isn't so different the suggestion in the referendum's aftermath that 50,000 to 70,000 London banking jobs would be moved overseas, or to BCG's claim in July that up to 80,000 jobs could move to mainland Europe. Oliver Wyman is, however, at pains to point out that even after a hard Brexit, its predictions only amount to between 3% and 7% of the UK's total financial services headcount of around one million people. If Brexit is "soft" and there's either passporting or equivalence, Oliver Wyman thinks total job losses will be restricted to 2% or below.
Things become a bit more painful when the UK's 470,000 retail bankers are stripped out of the equation. In this case, Oliver Wyman's prediction of 75,000 job losses equates to 13% of employment in traditional City activities like trading, investment banking, asset management, market infrastructure, and insurance. Even so, it implies that 87% of City jobs will be unaffected. So, if you want to stay in London post Brexit, the question is clear: how can you ensure you're not in the 13%?
This may be bleedingly obvious, but we'll point it out anyway: if you want to stay working in the City of London after Brexit, you need to involve yourself with the blue segments of the chart below. Avoid the grey.
Unfortunately, this strategy may not work in the medium and long term. "Restrictions on EU-related activity from their existing UK hubs may lead banks to establish entities within the EU. To retain the economies of scale these banks could move other activities that are not directly restricted into the EU and away from the UK," says Oliver Wyman.
Source: Oliver Wyman
As the chart above shows, a disproportionate amount of business in the 'market infrastructure and other' category relates to the EU.
Organizations in this category include exchanges, payment and clearing services, inter-dealer brokers, and data and fintech firms. Clearing houses are the ones to particularly avoid.
The European Union is expected to revive its failed policy of insisting that transactions involving euro-denominated assets must be cleared within the eurozone, and Oliver Wyman suggests the ramifications could be substantial: "If clearing portfolios are split or fragment across jurisdictions, this could lead to an increase in the cost of clearing arising from a shrinking pool of participants in smaller segmented markets. Due to these inefficiencies, some firms could move their clearing to a new single place within the EU."
This also goes without saying, but is worth reiterating. "A firm that loses its EU customers may no longer have the scale to operate profitably in the UK, and so exit altogether," says Oliver Wyman.
Clearly, you don't want to be based in London and selling to clients based in the EU. - These jobs will be first to go after a hard Brexit. Interestingly, though, Oliver Wyman thinks London's trading jobs could be safe: "EU entities could transfer positions to a UK entity for risk management purposes; products would still be priced from the UK."
Similarly, you don't want to be marketing UK funds to EU clients. You might be ok, however, actually managing funds which are owned by EU clients. "Portfolio management could still be delegated to the UK (in line with international norms)," says Oliver Wyman. Longer term, however, this might change: "As sales and trading businesses migrate from the UK into the EU, the benefits of managing portfolios from the UK could be eroded, leading some companies to manage a greater portion of their assets from within the EU."
If the post-hard-Brexit landscape is harsh for anyone, it's harsh for insurers. "Unless agreements were reached with individual member states, UK insurers and brokers would not be able to service EU clients. The entire value chain, including underwriters, risk and portfolio management and brokers could move to an EU entity," says Oliver Wyman.
The additional costs of Brexit could push marginal banks over the edge. With investment banking activities already, "delivering below hurdle returns of <10%," Oliver Wyman thinks Brexit will expedite the current round of bank restructuring. " For some institutions, the cost of relocation and the ongoing inefficiencies associated with a more fragmented environment could cause them to scale back or close parts of the business." In other words, you'll lose your job.
By the same token, you might want to avoid EU banks that are only marginally profitable in London: they'll almost certainly relocate to their home cities.
Lastly, you might want to work in an investment banking division (IBD). Curiously, Oliver Wyman makes no mention of London's equity capital markets bankers, debt capital markets bankers and M&A bankers in its report - expect to say that they're a comparatively small population of just 15,000 people. The implication appears to be that IBD jobs will be safe. However, the message from point 1 above still applies: come 2020 you may not be originating rights issues from German clients out of London; now's the time to cultivate a domestic or international client base.