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Financial services: why we can bank on London

by | Nov 22, 2018

CBRE’s latest London report ‘Why we can bank on London’ explores the three key challenges facing the financial sector: Brexit, changing regulation and the growing influence of fintech.

The UK is the most specialised major economy in financial services and the world leader in many markets including foreign exchange and cross-border lending. This underpins London’s second place ranking in the Z/Yen index of global financial centres (after New York). Financial services generate 14% of London’s GDP and employed 406,000 people in June 2018  – an increase of 13,000 in the two years since the EU referendum.

The UK financial sector generated revenues of approximately £200bn in 2015. 24% of this derived from EU-related business with 61% of that from banking services. Given the potential loss of passporting rights after Brexit, at least some of this revenue is at risk. We outline three potential solutions to this challenge. Ultimately, we expect Brexit negotiations to result in an enhanced equivalence deal with a character somewhere between Canada’s CETA deal and EEA membership. It is unclear whether UK-based banks will be able to continue accessing EU markets but they are reducing the amount of jobs they say they will move. Moving is complex and expensive; HSBC estimate it would cost $200-300m and are awaiting the Brexit outcome.

Since the global financial crisis banks have had to separate their retail and investment banking operations. This has triggered some ‘nearshoring’ with banks moving their retail banking headquarters to the UK regions. Meanwhile, the unregulated private equity and hedge fund industries offer a growth opportunity for London.

Regulations aimed at increasing competition between retail banks are also opening the door to challengers. The UK was recently ranked first globally for the strength of its fintech ecosystem by both EY and Deloitte, aided by favourable regulations, deep capital markets and established technology industry. As a result, UK fintech employment is predicted to grow by 30% by 2030.

Banks continue to focus on cost efficiencies but there is also emphasis on creating a positive workplace experience that helps to attract talent.  Banks are beginning to use agile working specialists to achieve this.

There is no consensus on the effect that AI will have on the financial sector. However Deloitte found that 62% of EMEA financial firms believe it will empower work, not eliminate jobs. Banks are responding by allocating huge tech budgets; given the tech talent available in London, this could create further jobs.

So while the UK financial sector is facing some substantial challenges, particularly with Brexit, there are several growth opportunities in fintech, AI and unregulated financial services, and banks are investing in their office space to attract talent. London is a powerful global financial centre with a major share of many global markets. This cannot be easily emulated by any other city in Europe in the immediate future. It is likely that incumbents will accept changing conditions in exchange for maintaining a presence in the UK capital.

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