Brexit will give Ireland a slow input of financial services not a bonanza

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By Cormac Lucey

With the features of the UK’s post-Brexit arrangements with the EU likely to be unclear until the end of 2018, many British-based businesses are seeking to relocate to — or establish a physical bridgehead in — one of the remaining 27 member states.

Even before last June’s vote by the British electorate, IDA Ireland was targeting banks, including Standard Chartered and Royal Bank of Scotland, in the hope of luring finance jobs to this country.

Last week, a significant victory in its campaign was marked when the US investment bank JP Morgan, which already employs 500 people in Dublin, agreed to buy the 200 Capital Dock office building on Sir John Rogerson’s Quay in the Dublin Docklands.

When complete, the new Capital Dock offices will be able to house 1,000 workers, giving JP Morgan space to create up to 500 new jobs here. According to Bloomberg, the American bank is paying €125m for the new office building, which is due to be completed by the third quarter of 2018.

So how is Ireland set to benefit as a location for other City of London jobs that may be moving because of Brexit? The answer to that questions depends on several factors. How many jobs will London cede because of Brexit? What are the merits of other locations within the EU? And where does Dublin stand in those rankings?

Estimates on the number of City jobs at risk vary widely. In February the Brussels-based Bruegel think tank estimated that the City of London stood to lose 10,000 banking jobs and 20,000 roles in accountancy, law and consulting, as EU clients moved business to the Continent following Brexit.

A report published last October by Oliver Wyman on behalf of TheCityUK postulated that about a quarter of all business done in the City was EU-related. It warned, if the UK secured only a low degree of access to the single market — now the likely scenario — it could cost 65,000-75,000 jobs, plus up to £38bn (€44bn) in lost revenue.

Last month Manfred Weber, the head of the Christian Democrats in the European parliament, warned that about 100,000 jobs were at risk as he asserted that financial business denominated in euros must move from the UK to the EU after Brexit. Weber said the EU should support its own financial hubs such as Paris, Frankfurt, Amsterdam and Dublin.

In estimating the likely impact on the Irish capital of financial services fleeing London in the wake of Brexit, we need to examine the services likely to depart and their characteristics. The Oliver Wyman report segmented the British financial services industry into banking; asset management; insurance; and market infrastructure.

There are very obvious network advantages in each of those areas. It makes sense for banking to be centred in one location in any country or economic bloc. Recruitment is easier if activity is centralised. Training is easier. Provision of consultancy services is easier. Development of specialised expertise is likelier. Arrangement of syndicate transactions is easier.

That suggests, whether initially or over time, that any big losses of activity from London are more likely to end up in one eurozone location than many.London looks set to lose its status as a euro clearing market. Clearing is the procedure by which an organisation acts as an intermediary and assumes the role of a buyer and seller in a transaction to reconcile orders between transacting parties. 

It is necessary to match all buy and sell orders in the market. It provides smoother markets as parties can make transfers to the clearing house rather than to each individual party with whom they have transacted.

Speaking in January, Benoît Coeuré, a member of the European Central Bank’s executive board, said it would be “challenging” for Britain to devise post-Brexit regulations that would provide sufficient confidence for UK-based clearing houses to continue to process trades in euros.

Earlier this month, the London Stock Exchange criticised proposals to restrict the city’s ability to host euro clearing, warning that any restriction on the clearing of euro hedging transactions would “damage European issuers, savers, investors, pension funds and intermediaries”.

That criticism was echoed when the boss of the US derivatives regulator cautioned European officials hoping to control euro clearing post-Brexit. They face a “decision that needs to be made with care” as the battle for the $1 trillion market heats up, he warned.

Given the closeness of the US and European derivatives markets, what Europe chooses to do on the supervision of CCPs [central counterpart clearing houses] undoubtedly will inform the evolution of US regulatory policy for cross-border swaps clearing.”

Where do Ireland and Dublin sit in this debate? On the margins, in my opinion. The financial services sector here is too small to aspire to replace London as the European financial centre of banking, asset management, insurance or market infrastructure.

And there’s a second factor that counts against us. If I have to relocate large chunks of my banking organisation because the UK has decided to leave the EU, I’d better make sure that I move to a country wholly integrated within the EU where the prospects of another exit are remote.

Perched out in the Atlantic and with our economy deeply integrated with those of America and the UK, Ireland does not fit the bill.

Ireland doesn’t offer a significant cost advantage compared with competing EU locations, according to a recent special report from Deutsche Bank, Mapping the World’s Prices 2017. It compared prices levels in 35 countries relative to those in the US, which it indexed at 100. Ireland came in at 107.6.

That was marginally cheaper than France (109.9) and Holland (108.2), but more expensive than Germany (101.3). We do have a low corporation tax rate and English-speaking professional services au fait with American common law practices.

That means our greatest chances may lie in attracting US and UK entities that are open to tax-planning opportunities and need a base within the EU post-Brexit.

Otherwise it is more likely to be an incremental rise in the existing international financial services sector, and not a great bonanza.

Published in The Sunday Times (Irish edition)

May 21st 2017

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