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Brexodus: scaremongering hype or a reality check for the UK's financial sector?

Speculation over a potential exodus from Europe's Fintech capital remains rife. Some firms are scoping out the alternatives, others are sticking to the mantra "keep calm and carry on," reports Sarah Bradbury from London.

Companies across the UK's booming financial sector have been planning for Brexit since before the referendum last June. And while much remains uncertain ahead of negotiations, the focus for businesses, both big and small, is minimizing disruption to delivering services - including preparing for the possibility that some of their operations will need to be relocated to cities elsewhere within the EU bloc.

Jo White at UK-based Fintech startup TransferWise says that her best case scenario is "we'll be two years behind."

 "While the UK government is negotiating its exit from the EU, it needs to plant a stake in the sand that it will ensure the UK is as competitive as it is currently."

Fintech London | Gründer der Firma TrasferWise (Sarah Bradbury)

TransferWise believes there are numerous cities around the world that are very happy to step into the breach if the UK is unable to convince Fintech companies to stay.

Bypassing the UK

Some big firms have already announced moves: HSBC have confirmed 1,000 jobs will be relocated to Paris, while Lloyd's of London will be setting-up a new European insurance company in Brussels from 2019. Others have released statements with thinly veiled threats that any decisions regarding where they focus their business will very much depend on how successfully the UK government secures the continued competitiveness of its city as a financial centre.

Citigroup's CEO James Cowles stated the day after Article 50 was triggered: "For planning purposes, we must assume a 'hard' Brexit in which the UK loses its ability to passport into the EU. A hard Brexit would require certain changes, including relocating certain client-facing roles to the EU from the UK, and the possible creation of a new broker-dealer entity within the EU."

Furthermore, a report produced by international law firm Gowling WLG last year on the impact of Brexit on transatlantic trade, suggested that in terms of the UK's financial services industry, over half (55 percent) of US companies would be prepared to bypass the UK in order to continue to do business with the rest of the EU, with just under half (47 percent) of those with a base in the UK considering moving elsewhere in the EU as a result of the Brexit vote.

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European rivals

And as is evident from the numerous visits of delegations from the French institutions over recent months, there are other European cities waiting hungrily in the sidelines to mop up any business that does spill out amid what could turn out to be messy divorce proceedings.

Commenting on the future of London's status as a financial hub, Kirsty Barnes, partner and Head of Banking and Finance at Gowling WLG, said: "As things stand, it's very much business as usual but all will be acutely aware of the pretenders to the financial throne eagerly waiting in the wings to step in should market conditions in the UK become especially unfavorable."

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Post-Brexit - Brits in Berlin

Dublin, Barnes noted, was very much stepping up its game, gearing up its infrastructure to attract business from across the pond.

"But the reality is, it and the likes of Paris and Frankfurt, while bonafide financial centers in their own right, simply don't yet have the offer to truly compete," she added.

Looking beyond Europe

A TheCityUK's report suggests at one end of the spectrum (in a scenario that sees the UK move to a third country status with the EU without any regulatory equivalence) up to 35,000 jobs could be at stake, though equally emphasizes that the "interdependent, interconnected ecosystem" of London as a financial hub is not easily replaceable.

Miles Celic, their Chief Executive, told DW: "While other centers across Europe may be seeking to draw post-Brexit business, the real risk is that activity leaves Europe altogether and goes elsewhere, to the likes of New York or Singapore, or ceases entirely as it is no longer profitable."

One of the biggest concerns for firms with operations in the UK is if a tougher line were to be taken on immigration policy for skilled workers. Anil Stocker, co-founder and CEO of Market Invoice, pointed out that the key reason fintech startups were blossoming in London was the broad appeal of the city - its cultural mix and quality of life - and, crucially, the free movement of talent.

Weighing up the alternatives, while Frankfurt could be considered the Canary Wharf of Europe, "Berlin is a hub of tech and engineering talent," he said.

Now or never

Jo White, Director of Communications at Transferwise, explained another key issue for Fintech startups is passporting rights: currently, being regulated in the UK means they are regulated all across the EU, whereas in future they may need to apply for a license elsewhere in the bloc, which for a larger company is fairly straightforward. "But for an early stage fintech company, it's a big deal," she said.

And as founder and angel investor Volker Hirsch suggests, young startups may follow the rationale: "If we move now, it's easy and cheap. If we are successful and scale, it will be more painful and expensive. So: we should move now, just in case."

Fintech London | Ahmed Badr (Sarah Bradbury)

For Ahmed Badr, a move wouldn't be too much a leap because the UK may be moving away from Europe politically, in terms of tech and culture, "we've never been closer," he said.

Ahmed Badr, Head of Legal at GoCardless, said they had always considered expanding to another European city, and Brexit was only speeding up that process out of necessity, with Berlin, Dublin and Frankfurt all under consideration for their potential talent pool, tax conditions, employment laws etc.

Unique London ecosystem

Conversely however, the CEO of UK-based accelerator Emerge Education, Jan Matern, considers much of the talk about start-ups and investment fleeing the city nothing more than "hype": "the fundamentals of the economy haven't massively changed from the start-up perspective. London remains a hub for great talent and for investors - I think that's very difficult to break."

In particular, Jan sees it as very difficult to replicate the start-up ecosystem that has developed in London: "To contemplate moving to Berlin now just because it is in the EU without knowing what will happen to trade and talent would be silly. Any action now will just be a gamble: the optimal behavior and that you will observe is just to keep calm and carry on, at least in the startup world."

Ultimately for many, as Market Invoices' Stocker concludes, it is a lack of clarity that is really causing harm to the fintech start-up scene: "The worst thing for business is uncertainty; even if it's bad news, we would rather know sooner rather than later."

So while for some talks of Brexodus is only scaremongering hype, for others, it's a wake up call as to just how much is at stake for the UK's financial sector in the case of a botched Brexit process.

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