With Brexit still mired in uncertainty and with less than six months until Britain leaves the European Union, private banks have started to unravel their contingency plans. For some, this has meant moving to other EU countries. Mishelle Thurai finds out more.
Before contingency plans can begin, a bank first needs to establish where it stands on Brexit. “Several investment banks have published their views on how likely each of the possible [Brexit] outcomes are,” Mohammad Syed, managing director of asset management for Coutts tells PBI. “Some have said the probability of a ‘no deal’ Brexit is around 20% while others think it’s closer to 15%.
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“We think those numbers are sensible, but there is an argument that there could be an even lower chance. Why? Because history has shown that the European Union (EU) does make deals, albeit often at the last minute. We’ve seen plenty of cases where countries have had issues with the EU – Greece, Portugal, Ireland and Cyprus – and every time an agreement has been ironed out.”
Other banks have a more pessimistic view of Brexit. Ryan Tholet, head of Investec Private Bank, says: “As a private bank and lender, potential Brexit outcomes such as unemployment, lower growth, skills shortages and rising inflation are of course a concern – it would likely lead to worsening portfolio credit risk, less disposable income, reducing net asset values and therefore potential inabilities to service and manage debt.”
“Fortunately, even though these are risks facing the broader banking industry, we also feel that the high net worth private client base is best positioned to manage these risks through their greater quantum of income, diversification of both assets, broader income sources and their generally better skills and experiences.”
Whatever the likelihood of a no-deal Brexit, all organisations PBI spoke to have contingency plans. One of these involves partial or complete relocation to another European jurisdiction. Here are the those currently being considered:
Luxembourg
Luxembourg has presented itself as an attractive financial hub and many banks have opened subsidiaries in this low tax jurisdiction.
In a major restructuring exercise JP Morgan has decided to merge its London-based business, JP Morgan International Bank with its Luxembourg subsidiary.
In a statement, the New York-based bank said: “As part of the long-planned restructuring, the firm proposes to merge two legal banking entities into one allowing for seamless client support for these specified businesses across the European Economic Area.”
Transparency has been a significant attraction for private banks moving to Luxembourg. A number of regulations have come in to effect heightening transparency, the penultimate being the rejection of tax secrecy in 2014 and a steer towards complying with the Common Reporting Standards (CRS).
Multi-disciplinary talent in Luxembourg has also been a key to its success in drawing in the private banking industry. Speaking to PBI, Tom Theobald, CEO at Luxembourg for Finance said: “It is no longer that you just have a relationship manager and a client. We see more and more on reliance on multidisciplinary teams. You have a lot of experts that you need to source in and pool in from other parts of the private bank to deal with the same client. That is how the private banking industry in Luxembourg operates.”
Theobald continues: “Luxembourg is today a leading hub to serve private banking clients on a cross-border basis in the European Union. Over the past few years, several Swiss banks have expanded their existing Luxembourg presence and centralised their EU activities in the Grand Duchy to act as their European hub for wealth asset management and fund services.”
These changes have bought with them an increase in wealth being booked in the Duchy. The Luxembourg Bankers Association released a report in 2017 stating that people with a net wealth in excess of €20m ($3.9m) accounted for more than half of all assets managed by Luxembourg private banks at the end of 2016.
But will Luxembourg take private banks away from London? Tholet again: “Those cities [where banks are relocating] just aren’t as well established in terms of location and infrastructure as London is.”
Frankfurt
Frankfurt is the seat of the European Central Bank, the Single Supervisory Mechanism (SSM) and the European Insurance Occupations Pensions Authority (EIOPA). It therefore presents a safe option to private banks looking at relocating to a jurisdiction within the EU.
Stefan Winter, chairman of the Board of Association of Foreign Banks in Germany said at a press conference in March: “We see an unbroken interest in the German financial centre among banks that are considering relocations due to Brexit.
“We expect about 20 banks to expand their presence here. This will involve up to 5,000 new jobs in the next two to three years, many of which will be hired locally.”
He added that actions were still needed for cities such as Frankfurt to consolidate as a hub for private banking in particular.
“Above all we need to look out for financial stability within Europe. We are going to need transitional rules in many areas to avoid legal uncertainty and market distortions,” Winter added.
Dublin
Anglophone Dublin has become a favourite for the tech industry thanks to its low tax regime. This means that Dublin also boasts a growing fintech industry, a sector that is becoming a crucial pillar of private banking.
The EY Brexit tracker has monitored statements made by 222 financial firms with operations in the UK, including 57 wealth and asset management firms. Nearly half – 22 out of 57 – of these wealth and asset management firms have publicly announced that they are considering or have confirmed moving at least some of their operations out of the UK.
Furthermore, 10 of these 57 wealth and asset management firms have confirmed they are moving operations to Dublin.
Speaking to The Guardian, Omar Ali who wrote the report for EY has said: “Dublin already has some of the back-office operations for some large investment banks and an asset management presence; it also has the benefit of being pretty close to London and of being English-speaking.”
Paris
Two of the world’s biggest money managers, BlackRock and JP Morgan Chase, are considering Paris for their new EU trading operations according to the Financial Times. Bank of America and Citigroup have already confirmed their intentions to transfer their trading floors to the French capital.
Though Paris might not win-over some asset manager’s EU headquarters, hosting their trading operations will have significant impact for wealth managers. Private banks and wealth managers gravitate to where the money is and if some of the biggest European trades are booked from Paris, it will be advantageous for private banks to locate themselves nearby.
Furthermore, private banks are all too aware of the personal wealth that trading desks create. If other asset managers follow in the wake of BoA and JPM in expanding trading floors in Paris, they will create significant new wealth that needs to be managed. Wealth managers will happy take up this task.
Previously hostile tax and employment policies have been rolled back by the Macron government, which has made France a more appealing place to do business. Paris also has more transport links to London than any other European capital making the relocation of staff from London less painful.
And the UK?
Optimism still remains in the UK as a centre for private banking. David Durlacher, CEO of Julius Baer International says: “At a time when continued uncertainty over Britain’s planned exit from the European Union has caused many in the market to reduce their UK exposure, we continue to reaffirm our commitment to the UK and Irish markets through our domestic expansion activities.
“Wealth management firms who are looking to move out of the UK are thinking too short-term, as we believe that the UK will continue to punch above its weight on a global scale. For example, there are parts of the domestic economy that are booming and there is value to be had in the consequences of Brexit, such as the introduction of new industries and the export opportunities.”
Durlacher cites the UK’s high ranking on the World Bank’s Ease of Doing Business index and its low unemployment rate of 4% as reasons to remain optimistic. He concludes: “We believe that the UK offers one of the world’s finest financial services industries, with a very strong regulatory framework. It is also a very attractive market for new industries such as technology and an innovation that is linked to some of the world’s best universities.”
With additional reporting from Oliver Williams
