June 21, 2016
London is the undisputed financial capital of Europe, and is rivaled only by New York City for the top spot worldwide (Global Financial Centers Index). When competing on a level playing field, London outperforms other major European financial centers because of the superior human capital, infrastructure, and regulatory environment of the city. London dominates 78 percent of European FOREX trading and generates a trade surplus worth tens of billions of pounds (UK Office of National Statistics).

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European Union (EU) membership is a key factor in maintaining the level playing field. All financial institutions based in EU countries benefit from the right of “passporting”: the ability to access EU markets without needing to navigate the onerous national regulation and capital requirements imposed on non-EU trading partners. This not only helps UK-based financial services companies operating on the continent, but also encourages US and Asian firms to set up offices in London to get access to EU markets. Additionally, EU firms open offices in London as a springboard to engage with non-EU markets. All told, London’s financial sector has prospered from jobs, tax revenue, and global influence.

The UK referendum on June 23 puts this into question. If the United Kingdom (UK) were to vote to leave the EU, the future of “passporting” would be subject to UK-EU negotiations, and would therefore be uncertain. The possible loss of “passporting” and the years of uncertainty about UK-EU relations would put London at a distinct competitive disadvantage. Financial institutions like Goldman Sachs already plan to shift resources to other EU destinations, like Frankfurt, if the UK leaves the EU. PwC has estimated that the UK financial services sector would contract by 5.7-9.5 percent and lose 70,000-100,000 jobs (PWC). In a post-Brexit world, London would still retain most of its fundamental advantages as a financial hub, but it would be competing on a playing field tilted against them.

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