There has been much concern about the effect of Brexit on the UK’s financial services industry and the position of the City of London. Both Paris and Frankfurt have been seeking to attract people and business from London post-Brexit. European regulators have warned of restricted access to the EU if Britain leaves the single market, as it is likely to do.
One would expect that the dire warnings about the City’s future would cause a fall in business activity ahead of the UK’s exit, but that does not appear to be happening. Last year, cross-border lending by UK-based banks significantly increased for the first time since 2014. Foreign claims by the UK banking sector rose by $300bn last year to $5.1trillion, the biggest one-year increase since 2007 (see chart). The UK’s foreign banking exposure is about the same size as France and Germany’s combined. The upswing in global activity has played a part, but that only serves to underpin a broader point about London’s resilience as a venue for finance beyond Europe.
Since the Brexit referendum in 2016, London has maintained its position as the world’s premier centre for financial services, ahead of New York, Hong Kong and Singapore. It remains the case that London provides not just very deep capital markets, but a trusted legal structure; a whole range of ancillary services, covering insurance, tax and business consultancy; and world-beating cultural amenities.
There are strategic threats to the financial services industry of many large cities. An incompetently arranged Brexit is of course one only for London, but the rise of FinTech and the trend of large institutions spreading out their operations beyond the big cities also provide challenges.
What does this all mean for family offices? Whilst genuine family offices provide a broad range of financial and non-financial services, the impact of Brexit would only have the potential to affect cross-border financial services such as investment management, capital raising and private equity transactions. Many of these services in the UK operate outside the scope of European regulation and will remain so after Brexit. The UK will be an attractive place for European families who wish to base some or all of their operations outside of Europe and benefit from any regulatory divergence that the UK makes post-Brexit.
There have been worries over whether the lack of so-called passporting rights for UK firms to operate in Europe post-Brexit and restrictions on the delegation of European business to the UK could harm business with EU citizens. However, in recent weeks, Brussels has begun to recognise that any serious trade restrictions would hit both sides if they were effective, or could be nullified by new UK regulatory and tax laws that create strong incentives for European firms and clients to relocate.
One particular area of the industry which is booming is private equity. The total amount spent by private equity firms on new buyouts in Europe hit €90.2bn last year, a rise of 50%. Much of this was driven by the UK, where total deal value almost doubled from €14.7bn last year to €27.1bn this year.
Aspects of the UK private equity industry fall under the regulatory auspices of the FCA and with international investors frequently participating in such investments it is important to consider the impact any change in passporting rights might bring.
Interestingly, however, the vast majority of countries where investors reside exempt either the sophisticated, professional and High Net-Worth investor or the private equity industry from regulatory oversight. Single family offices are exempt for regulations from both the UK and EU. UK-based family offices are therefore well placed to facilitate deals, benefitting from high deal flow, deep capital markets and decades of institutional experience.
We cannot be sure yet what the specific outcomes from the Brexit negotiations will be, but whatever they are, the UK will continue to be an attractive place to do business. London has been at the heart of the global economy for three hundred years and has survived all manner of events including the US War of Independence, the French and Russian Revolutions, and the cataclysms of the 20th century. Brexit cannot really be compared to events of this magnitude. Modern family offices, which have been around since the 5th century, will adapt too, always to the benefit of the clients they serve.
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