UK may lose 40,000 investment banking jobs to 'Brexodus'

The UK financial sector could face as many as 75,000 job losses if hard Brexit becomes a reality. According to updated research, the exodus may include 40,000 investment bankers, while having a severe knock-on effect on the broader financial service ecosystem, including specialist professional service firms, while the UK economy as a whole could miss out on £10 billion in tax revenue every year.

In the protracted fallout of 2016’s referendum result, a growing number of groups have been predicted to begin leaving the UK in anticipation of a hard Brexit which will most likely be hostile to their needs. These have included migrant workers, NHS staff, prospective students, graduates, manufacturers and many more. The latest group to become part of the forecast “Brexodus” are financial service providers – with a new report from Oliver Wyman warning that as many as 40,000 investment banking jobs are on the brink of relocating to the mainland.

The recent warning comes on the heels of a previous study carried out by the consulting firm in partnership with the industry's main lobby group, TheCityUK, which forecast that 75,000 jobs may disappear from Britain if finance firms, including insurers and asset managers, lose the right to sell their services freely across Europe, costing the government up to £10 billion in lost tax revenue.

Over the course of its long history, the UK-based financial services sector has established an interdependent and interconnected ecosystem, with numerous financial and related professional services firms working together as part of the business chain. According to the authors of the report, this ecosystem has enabled the UK to build an innovative environment conducive to long-term growth. Current beneficiaries of the system see each part of the value chain able to provide high quality services, due to proximity and understanding of each other’s needs, meaning they can deliver enhanced performance to clients.

Thanks to the UK’s thick concentration of talent and competition meanwhile, economic necessity has driven innovation within the market to higher levels, meaning the country has also become host to centres of excellence providing services not available elsewhere, such as lucrative corporate and specialty insurance industries, along with a variety of specialist professional services becoming part of that financial services ecosystem.

As a result of the draw of these innovative and economically potent financial services, the UK has become increasingly dependent on the sector. Exporting financial services currently see the British economy provided with a trade surplus of approximately £58 billion. Further analysis found that approximately half the sector’s revenues in the UK were presently from international and wholesale business, something which would potentially be hit hard by tariffs and hard-borders in a worst-case-scenario.

The “No Deal” currently favoured by Prime Minister Theresa, rather than making concessions on Single Market membership and Free Movement could make the export of financial services and the professional services associated with them increasingly difficult, while hitting their profitability hard. Activities potentially impacted by this include providing complex risk insurance for corporate clients; trading bonds and equities with investment firms managing savings and pension funds, providing currency for international trade, managing assets and allocating capital on behalf of investors, and providing data and technology to businesses and consumers, among others.

A study from Deloitte recently noted that CFOs across the UK business scene were increasingly concerned with the nature of Brexit in this regard. That report suggested organisations perceived Brexit as the biggest threat to their profits in the coming years.

Panicked by the UK government’s floundering EU exit talks which began in June, following a humbling election result which saw the Conservative Party lose their majority, banks with operations in Britain are already establishing entities on the continent, with Frankfurt emerging as the top destination so far.

So long, farewell, auf wiedersehen, adieu

In order to counter the increasing financial pressure on trade with the continent thanks to Brexit, banks are weighing up pumping as much as $50 billion in extra capital into EU subsidiaries “to support new European entities.” This comes as numerous institutions plan a “no regrets” strategy of planning for the absolute worst hard Brexit deal, as they perceive trade from inside the EU would ultimately be easier and more profitable in the long-term, than suffering set-backs within the post-Brexit UK. Citigroup, Bank of America and Morgan Stanley have all indicated recently that they are finalising plans for subsidiaries within the surviving EU states, along with Britain's own Barclays.

Oliver Wyman’s paper meanwhile weighed up to what extent this is likely to hit jobs in the best and worst case scenarios, depending on the level of access to the EU left open for the financial service ecosystem, after negotiations conclude in 2019. In the highest access scenario the UK is recognised as having regulatory equivalence across a wide range of existing European legislation. In addition, new accords would be required in areas where no provisions currently exist as the UK has previously relied on EU law, in order to grant passports to third countries, notably around the Capital Requirements Directive (CRD) and the Insurance Mediation Directive (IMD).

At the other end of the spectrum, the lowest access scenario would be a situation where the UK moved to a third country position with the EU, without any recognition of regulatory equivalence, and placing significant restrictions on the EU-related activity that UK-based financial firms would be able to undertake legally. Between these ends of the spectrum is a complicated web of interconnected laws and regulations, some of which have provisions in place to grant equivalence to third countries and some of which do not, such as CRD. If granted, these areas of legal and regulatory equivalence could give UK based firms and infrastructure access to EU clients and infrastructure across certain products and activities, however the more hostile the Brexit, the less likely these provisions will be accessible to UK businesses.

While higher access deals would still see some impact on the industry, compared to the hardest Brexit imaginable, this damage is negligible. In the scenario with the lowest access, first order impact to the simplest most fundamental level of organisations would likely see £18–20 billion (~10%) of revenues lost along with as many as 35,000 British jobs in the Financial Services sector. Meanwhile, the knock-on impact on the ecosystem could result in the loss from the UK of activities that operate alongside those parts of the business that leave, the shifting of entire business units, or the closure of lines of business due to increased costs, bringing the figure to a further estimated £14-18 billion of revenue lost.

This could subsequently see an utmost total job loss of 75,000, including the 40,000 investment bankers Oliver Wyman has most recently focused on, while the country might also miss out on an estimated £10 billion in tax revenue per annum as a result. The losses of the financial sector would ultimately hit the UK as a whole hard then, as vital public services such as the NHS remain severely under-resourced, with a government steadfastly unwilling to implement tax and spend as it is.

Oliver Wyman is not alone in predicting a banking exodus meanwhile. While Bain & Company had last year anticipated the UK could haemorrhage £3 billion from its resident companies’ profit pool, the Centre for London estimated that as many as 70,000 roles could relocate from the City of London post-Brexit, while Big Four professional services firm EY last year predicted 83,000 financial services jobs could be lost.

According to Matt Austen, UK Head of Financial Services at Oliver Wyman, the move is happening sooner rather than later, with institutions unable to sit on their hands during EU/UK negotiations. "The banks are working on ‘no regrets’ moves, which increase options but don’t cost that much either to undertake or to reverse," Matt Austen, said. "If you want to move people in advance of March 2019, realistically, the latest you can afford to wait is next summer, maybe even sooner," he concluded.