Never trust a politician. Three days ago, the UK's Brexit Minister David Davis and the UK's Chancellor, Philip Hammond, were busy reassuring bankers at Barclays and Goldman Sachs that the City of London's transition to a post-Brexit world would be "smooth and orderly." Today's leaked memo from a City of London Corporation executive who met David Davis suggests it will be anything but.
Davis comes across as hubristic and intolerant. He thinks he knows more than bankers about the industry they work in, and says he and the government won't "abide" with anything that slows the process to exit the EU - whether it makes sense for finance jobs or not.
1. Davis thinks banks are exaggerating
According to the memo writer, Davis thinks the City needs to let go. He views it as not having, "moved on from the Referendum and accepting the outcome." It needs to get over itself.
He wants, "“facts and evidence.” These are defined by Davis as, "clear, supported statistics and research about the impact on jobs and organisations as a result of not having access or adequate arrangements for different forms of trading or financial services activity." He also thinks financial services PR firms are behind the noise about jobs moving out of London, not banks themselves.
Why Davis is wrong: It's not PR firms that are banging the drum about Brexit, it's banks themselves - and consulting firms. Jamie Dimon at J.P. Morgan famously said he could cut 4,000 UK jobs after Brexit, Sergio Ermotti at UBS said he could move 30% of staff from London. HSBC has said it could move 1,000 trading jobs to Paris. Consulting firm Oliver Wyman surveyed City firms and drew up a report suggesting up to 75,000 jobs could move. This tallied with a previous report by BCG suggesting 80,000 jobs could move.
These are statistics supported by research, and they're not from PR companies. When the statistics don't match Davis's preconceptions, they're labelled propaganda from PRs.
2. Davis thinks that bankers love London so much they won't want to move
The memo writer says Davis also "queried whether the employees of US banks warning of relocating in Europe would actually relocate, given the unattractiveness of Frankfurt and other cities in the EU, in comparison with London."
Why Davis is wrong again: Dan Davies, senior research advisor at Frontline Analysts and a former banking analyst at Cazenove, has a few things to say about this on Twitter. Firstly, he says American bankers would, "go and live in Chernobyl if that's what their career required. London isn't some dream posting."
IME of US bankers, their ranking of favoured locations is a) New York b) whichever US city they came from/went to college c) anywhere else
— Dan Davies (@dsquareddigest) December 9, 2016
BECAUSE WHEN YOU'RE WORKING 90 HOUR WEEKS YOU DON'T REALLY CARE ALL THAT MUCH ABOUT THE ROYAL OPERA HOUSE OR HESTON BLUMENTHAL
— Dan Davies (@dsquareddigest) December 9, 2016
In any case, Frankfurt is actually pretty nice. And as Davies points out, plenty of the bankers in London are from the EU rather than the Americas, and many of them would be more than happy to go back to their home countries.
3. Davis is fine with banking jobs moving to New York, just as long as they don't go to Europe
David Davis also told the memo writer that if jobs leave London they, "will go back to New York not Europe." The implication is that this would be ok.
Wrong again: Davis might want to read our article on why the UK needs the City of London. £30bn of taxes aside, there's also the City's positive contribution to reducing the current account deficit and the multiplier effect of City jobs across Southern Britain. The jobs might move to New York or New Jersey instead of Frankfurt, but the UK would still suffer.
4. Davis has no interest in transitional arrangements
What banks really want is a phasing-in of Brexit. A document drawn up by lobbyists on behalf of banks is calling for the UK to remain subject to EU laws for five years after Brexit. Jamie Dimon asked Philip Hammond for the same thing last month.
Davis isn't buying it. The memo writer says he sees no "benefits" from a phase-in and that delaying Brexit, "is not something the Government can abide."
According to the memo, the only way the UK will get transitional arrangements to save UK banking jobs is if the EU, rather than UK stakeholders, want to have transitional arrangements. In this case, the non-abiding but ever-benevolent Davis reportedly said, "I will be kind”.
Why this is WRONG: Fundamentally, therefore, banks in the City of London now have two years from the Article 50 trigger date in March 2017, to prepare for Brexit. If there were a transition period, banks could spend those two years making contingency plans and waiting to see how the Brexit negotiations play out. With no transition period, they'll need to actually start moving jobs and operations out of London from March onwards - just in case a hard Brexit is forthcoming. Shifting operations is a complex business which will take two years at least and banks don't have the luxury of playing "wait and see". As Douglas Flint, chairman of HSBC, noted in September, it took the bank three years just to move staff from London to Birmingham. If there's a chance banks will need to move jobs to Frankfurt, they need to start soon. This seems to have escaped Davis's attention.
5. Davis thinks passporting is unimportant
Davis also seems to think passporting is unnecessary. Most interestingly, he reportedly thinks he knows more than banks on this issue: "Does not believe that business leaders actually understand when Passporting is actually required and is not as vital as many suggest," says the memo writer.
Wrong: Again, this looks hubristic. Although Moody's has said the end of passporting wouldn't be the end of the City, the government's own research suggests 5,500 UK-based companies use passporting to operate around the EU. Without passporting, those companies will either need to set up fully licensed EU subsidiaries (and move a proportion of jobs there), or they'll need to rely on 'third country regimes' and equivalence. As the chart below from Deutsche Bank shows, third country regimes aren't comprehensive and won't compensate for the loss of passporting in areas like FX and retail investment services. More to the point, as Simon Gleeson, regulatory partner at Clifford Chance LLP, told Bloomberg: “There’s only one thing about equivalence that really matters and that is that it can be withdrawn at any time.”
The good news: Davis is going for equivalence +
The only good news from the Davis memo is that the Brexit minister seems to have espoused the concept of 'Equivalence+'.
First touted by Alex Wilmot-Sitwell, EMEA president of BAML, in September, this suggests that the City of London should aim for equivalence and specify that the EU can't arbitrarily suspend this access at any time. Even better, Wilmot-Sitwell wanted the City of London to have a say over the EU regulations being matched - "a shared regulatory response."
In his way, Davis seems open to this. He recognizes the need to address banks' fears that, 'the French would “pull out the rug”" [from equivalence], says the memo writer. He also proposes, "a mechanism “to stop that happening quickly.”"
A mechanism would be nice, but it's all pretty vague. Will the EU really agree to it? And in light of the Brexit minister's lack of willingness to listen to banking executives when they voice their Brexit concerns - and presumption that he knows more about the industry than they do - will banks really stick around to find out?