Brexit means London's financial star is falling. Which of its rivals is best placed to rise?

It isn't just a question of tax and regulation as bosses weigh up where to go. Their choice has to be somewhere that has the people they need, and can be counted on to attract them

“I mean Dusseldorf? Why on earth would I want to move to Dusseldorf?”

This was the appalled reaction of a banker friend of mine in reaction to the prospect of being relocated to the German city as a result of the Conservative Party’s lunatic hard Brexit.

In case you hadn’t noticed, the latter is delivering a gut punch to a part of the British economy that exported a world-leading £77bn of services, and contributed £72.1bn in tax to the UK exchequer in 2017.

In the absence of a miracle, London’s world-leading financial centre is set to emerge much diminished from what has been going on, with banks and other financial institutions actively setting up subsidiaries in EU countries so they can continue to do business in the event of the UK tipping over a cliff. They will be ready even if the country is not.

But which of the rivals vying for London’s business will emerge as the winner?

And how will its workers feel about relocation there? That’s something banks have to take into account, dealing as they are with highly qualified, and mobile, personnel.

My banker friend’s dismay at the prospect of his particular business unit relocating to Dusseldorf wasn’t entirely fair.

Mercer, a consultant, regularly looks at the quality of life offered by the world’s cities. It rated the capital of the state of North Rhine-Westphalia as one of the 10 best places to live in the world, and the fourth best in Europe. Dusseldorf has held that exalted status for more than a decade, too.

It’s clean, civilised, has a fine academy of arts, and is the birthplace of the mighty Kraftwerk, the pioneering electronic music band.

While it doesn’t merit a place in Z/Yen’s global financial centre index, there is a respectable enough financial services industry there, the employees of which have much to be thankful for.

But, of course, it isn’t London.

The capital of Britain limps in at a dismal 41st when it comes to the annual quality of life rankings compiled by Mercer, a consultancy firm. However, it is one of only a handful of cosmopolitan, truly global cities. It might have its warts, it occasionally drives those of us that live here up the wall, but many of its residents would be loath to live anywhere else. After all, as the saying goes, “If you’re tired of London, you’re tired of life.”

Is that something that you could say about Frankfurt, or Hamburg, or Luxembourg? Or even Dusseldorf?

Probably not.

Nonetheless, a number of those working in financial services are having to resign themselves to the prospect of relocating to one or other of them.

The exodus the Leave campaign said wouldn’t happen is under way. The numbers have been relatively small to date. But they are expected to rise rapidly over the coming months, especially if the UK crashes out without a deal, as seems increasingly likely.

The trouble is, all of London’s rivals come with significant drawbacks.

The Z/Yen index has only one other EU financial centre in its top 20. That would be Frankfurt, which still fell nine places in the latest report. Although its overall points rating ticked up a bit, others overtook it.

However, it looks as if Frankfurt and its rivals are set to climb over the coming years, if only because of the one big advantage they all have over London: their host countries are governed by more or less sensible people.

Option 1: Frankfurt (Z/Yen Ranking No 20)

The German city has long fancied itself as London’s chief European rival.

However, it should be noted that, according to the TheCityUK, Britain’s capital employs nearly 800,000 people in its financial centre, more than actually live within Frankfurt’s administrative boundaries, and about a third of the population of the urban area as a whole.

Nonetheless, Frankfurt has been on a charge. Its most recent victory came courtesy of Deutsche Bank, which shifted a large part of its euro clearing activity to the city. The gesture was a largely symbolic one (it was done with the flip of a switch), but it was nonetheless seen as a victory for a campaign by the Frankfurt-based Deutsche Borse to grab a larger slice of what is a lucrative market.

One of the biggest knocks on Frankfurt is that it has something of a reputational issue.

When City types declare that they’re going to visit the home of both the European Central Bank and Germany’s Bundesbank, it’s not uncommon for them to get an “oh dear, poor you” in response. “I know,” goes the typical reply, “but I’ll be back before the weekend.”

The city is aware of the issue.

“Frankfurt is an amazing city to live in (and visit), especially for young, successful professionals,” gushed an email from Frankfurt Main Finance, which serves as the voice of its financial centre in a similar way to the TheCityUK for London.

It continued: “However, the city is often overlooked by journalists and has a reputation for being provincial. This is something we would like to change.”

On offer was an opportunity to sample the World Club Dome weekend, billed as “the world’s biggest club event with an international DJ line-up” and boasting 700,000 square metres of dance floors. Yah boo sucks to anyone who calls us provincial!

There’s also a museum devoted to electronic music (something Germany does extremely well – it’s not just Kraftwerk) and more besides.

Still, a recent report by PricewaterhouseCoopers into the UK’s financial and professional services industries looked at London’s main rivals couldn’t resist noting that while Frankfurt compares favourably to the UK capital in terms of its low crime and enviably high quality of life, it “has less cultural appeal than London or Paris”.

The same report went on to note that: “German authorities and regulators are seen as predictable, but not particularly flexible or innovation-friendly. There are restrictive labour laws and high taxes.”

One problem that Frankfurt doesn’t have: English is the language of international finance and Germany’s great financial institutions have no problem with using it (if you’re English and feeling embarrassed about that now you wouldn’t be alone).

Option 2: Luxembourg (Z/Yen Ranking 21)

Just a tick below Frankfurt, and scoring a top 20 rating in the Mercer quality of life index (18th position globally), is Luxembourg, the tiny, landlocked Grand Duchy, sandwiched between Belgium, Germany and Austria. What we’re actually talking about here, however, is the capital, which also goes by the name of Luxembourg.

The place has long enjoyed a reputation for low taxes, to the extent that that European Commission has been investigating some of the deals struck with internet companies such as Amazon in recent years.

When it comes to financial services, it has established a reputation as a leading centre for asset management, hosting the second largest investment fund market globally, together with one of Europe’s largest private banking markets.

The place has also benefited from longstanding social and political stability, which has supported its development as an international financial hub.

PwC praises “its modern and continuously updated legal and regulatory framework”. They have “supported the development of specific sectors”, for example, alternative investment funds, venture capital funds and international pension funds.

It also hails the “regular and close collaboration between the government, regulators and private sector, which has contributed to its success”.

The tax and regulatory systems are also seen as ultra stable. On the flipside, it might not be seen as the most exciting place to live, and its population is less than that of Ipswich. So it doesn’t have the sort of “cluster effect” that makes it relatively easy for big institutions to get the qualified staff they need in the really large financial centres.

Option 3: Paris (Z/Yen Ranking 24)

Like London, Paris is a world city. You couldn’t imagine anyone saying “oh God, not there” at the prospect of being relocated to the city of lights even if Mercer has it in only 39th position as regards the qualify of life on offer there (two spots above the UK capital).

The disadvantage with the place was summed up by one financial services manager of my acquaintance: “It’s the sort of place to take your lover for a romantic weekend, but not the sort of place you’d go to set up a business.”

A lot of people in City circles have talked only half-jokingly of worrying whether any work would get done if they relocated there.

Just like the perception of Frankfurt being terminally dull, that’s probably an exaggeration and not entirely fair.

Paris has an entirely legitimate financial centre that has enjoyed some success.

But it has likely factored into bosses’ thinking all the same.

According to PwC’s assessment, the place has traditionally been focussed on domestic banking, but “it is also developing a leading position in investment management and corporate bond issuance within Europe”.

It notes that France’s regulatory authorities are attempting to become more responsive, “but are not perceived to be as market or innovation-friendly as some other regulators”. Another criticism is the “difficulty of interaction with the tax authorities”, along with “high corporate and personal tax rates, restrictive labour laws and limited use of English”. The latter is not a problem for Dublin or Frankfurt, or even Hamburg.

France is trying to work on some of these, up to and including offering conditional tax incentives to draw people in.

Option 4: Hamburg (Z/Yen Ranking 29)

Not an option that has been much discussed, Hamburg is actually where Germany’s first exchange and its first privately owned financial institution (Berenberg Bank) were founded. Today it boasts a stock exchange, a banking sector that employs 25,000 people, Germany’s third largest insurance centre and a sizeable fintech hub. As far as pros and cons go, they’re similar to Frankfurt’s, although as the main centre the latter would be the first choice of many.

As a place to live it ranks 19th in Mercer’s rankings, in which German cities do very well as a rule. It’s also the home of FC St Pauli, the cult football club famed for the left-leaning character of its supporters. A trip there is probably not the sort of diversion that would find favour with bankers on the lookout for something to do of a weekend.

Option 5: Dublin (Z/Yen Ranking 31)

Dublin has a lot going for it, both as a place to live and to do business. It boasts the sort of low tax regime judged to be “business friendly”, for which read “low” (and how), not to mention its favourable rates of personal taxation for higher earners.

It’s a lot smaller than London, or Paris, but the City has plenty of attractions all the same. You aren’t likely to hear many complaints from people asked to spend a few days away there.

In terms of “quality of life”, it’s in the same ball park as London and Paris, at number 34.

The traffic, in particular, can be murder and is forecast to rise quite rapidly over the coming years. Meanwhile, the Irish Times recently complained that the City’s once legendary nightlife is “disintegrating”.

PwC’s report praises its strong reputation in back office fund management operations, and insurance, but criticises its less developed capital markets (stock exchanges and the like). The local financial sector is large relative to the economy but PwC says that the financial centre has “less breadth” than its rivals. “This is reflected in the current focus and capabilities of the regulator.”

There may also be a perception that it is some way away from the centre of the European action due to its geographic position.

Its strong technology sector is seen as a big advantage, and the government there has cannily sought to make the nation “Brexit-ready”. There is also a tax relief programme to support foreign companies in relocating staff.

The investment fund set up by arch Brexiteer Jacob Rees-Mogg and his old Etonian chums can certainly testify to the attractions of the place, having set up an office there and started launching product out of it. Go Dublin!

But who’s going to be the biggest winner out of this lot?

Drum roll please: It is of course, New York.

All of the above have notable disadvantages. They are either too small, too niche, or too domestically focussed to truly rival London, and the quality of regulation could be seen as an issue with some.

With London becoming less attractive, a lot of American banks have simply shifted their operations back home. Asian centres are also set to gobble up bits of business.

There is, all the same, still a lot to gain for everyone in Europe’s rival financial centres as London’s star diminishes. Unless of course, Britain’s truly dismal government pulls back from the cliff. As a disadvantage that government looms very, very large.