London’s Coming FinServe Fizzle?

Speeches can be momentous, can make or break an administration and can sear the collective consciousness with just a few words. Oh, we’re talking about Theresa May. On a day where the guard is really changing, the guard is really changing – not just in the United States, but in the U.K. as well. This week’s sizzlers and fizzlers played out a bit on a global stage.

Sizzle

Bank Earnings: Earnings rebounds are showing up early in the earnings season. With the exception of Wells Fargo, which has its own special set of issues, companies like JPMorgan and Citi are seeing trading volumes bounce back and consumer loans on the upswing, too. Card adoption seems to be proceeding apace, with pockets of strength internationally. And all this before the Fed rate rise machinery really kicks into gear, which should help goose earnings down the line.

Commuters (Uber Pretax Benefits): Workers who must trek to the office now get a break – helping the wallet and the purse – with Uber’s partnership with Ameriflex, Benefit Resource and others. Users get to use pretax dollars on prepaid cards for train and bus rides. May not make the trip shorter, but gives you more money to buy coffee to survive the schlep.

Driver-less fleets: TomTom buys self-driving startup Autonomos, which gives some tailwind to the map based and navigation products. But beyond that TomTom also struck a deal with Shell to give holistic fleet management tools to corporates.

Fizzle

Navient: The CFPB is suing the loan servicer for, in part, steering customers into forbearance when they might have qualified for lower payments. Payments were also allegedly incorrectly processed, resulting in higher fees. Fizzle for oversight, performance and adverse impact on borrowers.

Brick-and-Mortar Retailers: Store after store is being shuttered, across brands once as iconic as the Limited, American Apparel and Sears. Bankruptcies abound, and the culprit is the not-so-suddenly silent footfalls that once were tied to a roar of mall traffic. Click, click, click in online gives way to the click, click, click of doors being closed, permanently, at department stores and some specialty retail storefronts.

Amazon India: Missteps this past week, as product sales caused a stir, chiefly as a doormat bearing the country’s flag was sold in Canada, and sandals bearing the image of the revered Mahatma Gandhi also joined the plethora of offerings.  Sometimes tone-deaf merchandise can have an outsized impact on social reputation (and possibly sales).

After several months of speculation about what the Brexit will mean, the answers are starting to pour in – and banks do not exactly find them comforting.

Since British voters went to the polls and shocked the world with a vote to say goodbye to the European Union, there had been some hopes (particularly in the financial services sector) that Prime Minister Theresa May (another of the summer’s surprises) would support something like a “soft Brexit.” While the details of what a soft Brexit would look like were always sketchy, proponents described something which would have freed the U.K.  from some of the E.U.’s regulatory structures and benefits but kept it involved in the common labor market and able to “passport” various services across national boundaries.

And as it turns out, it doesn’t really matter what the detail of a soft Brexit might have been, because the Prime Minister isn’t taking that direction. In remarks made earlier this week, Prime Minister May made it clear that the British People had voted to leave – for real – and that was exactly what her government intends to do. Though she advocated strongly for a robust and fully negotiated free-trade deal for the U.K. and the E.U., and for London’s benefits as an international trading hub, she made it clear that the U.K. will be leaving the single market once it triggers Article 50 sometime in March of this year.

And while reactions to May’s remarks were mixed, British audiences mostly liked the confidence in her remarks, while EU audiences found her “unnecessarily strident” – they certainly did set an interesting stage for the World Economic Forum in Davos, Switzerland this week.

On the whole, things do not look good for London’s future as a financial services hub so far, despite May’s efforts to plug the city’s importance to the world. Big banks aren’t pulling the plug exactly – but they are pulling back. And so far, it doesn’t look like the British government has any plans to back down.

London’s Not Calling

According to reports in the Financial Times, the immediate response to May’s remarks around the movers and shakers and Davos was a “flurry of senior financiers” moving to discuss how they can transfer large chunks of their operations out of the United Kingdom.

Axel Weber — the one-time head of the German central bank (now the chair of UBS) — told the media that around 1,000 jobs out of the 5,000 or so the Swiss bank has stationed in London will likely be relocated as a result of the Brexit. JPMC has noted that as many as 4,000 of its 16,000 U.K.-based staff will likely be affected as well.

“It looks like there will be more job movement than we hoped for,” JPMC’s Jamie Dimon told Bloomberg TV. “We don’t want to — it is not a threat — it is just a fact that we will have to accommodate the new requirements.”

HSBC has also confirmed plans to move 1,000 roles in its London-based investment bank to Paris.

There are some outliers. Goldman Sachs has denied a report in Germany’s Handelsblatt that it will cut its U.K. staff numbers to 3,000 from 6,000 with a partial relocation to Frankfurt – though they have not entirely ruled out a move.

“There remain numerous uncertainties as to what the Brexit negotiations will yield in terms of an operating framework for the banking industry,” Goldman Sachs said. “As a result, we have not taken any decisions as to what our eventual response will be, despite media speculation to the contrary.”

The conventional wisdom around Davos so far, according to reports, is that though London remains valuable on the world economic stage and that the passporting rules that allow banks to sell common products throughout the EU without extensively negotiating contracts across every new border are crucial to its status as a financial hub.

Other areas of concern were the fact that Brexit will also likely strip London of its status as an international hub for Euro clearing.

On the upside, most of the larger banks said the difficulties will be more procedural than technical – although adjusting to the new order will likely be harder than anyone is expecting.

“This is going to take a lot longer than people think,” one U.S. banking executive noted.

Going Forward

May had a second chance to talk to Europe’s financial and political leaders, as it was her turn to take the stage at Davos.

May said Brexit was a vote to “take control and make decisions for ourselves” and to become “even more global and internationalist in action and spirit as well.” She also had some unusually strong words for the assembled about the dangers of globalism and the politics of “division an despair” that tends to rise out of resentment of it.

“Talk of greater globalisation can make people fearful. For many, it means their jobs outsourced and their wages undercut. It means having to sit back as they watch their communities change around them,” May noted. “And in their minds, it means watching as those who prosper seem to play by a different set of rules, while for many life remains a struggle as they get by, but don’t necessarily get on.”

Response to the speech in the room was reportedly a bit chilly — even for Switzerland. May reportedly was heard in silence and received a short round of polite applause when she was finished.

“She said nothing about how Britain is going to get there. Let’s be honest, we need many more specifics,” Finland’s foreign minister, Timo Soini, told USA Today on the sidelines of the meeting that ends Friday. “We need more from her on the different paths to prosperity. When you say you are leaving (the EU), the implication is that you are leaving something that isn’t working. That’s not true.”

And while that disagreement will likely be taken up many times over the next few months — is the EU really working — in the case of the U.K., it is largely irrelevant because they are leaving.

And it is worth noting that thus far things have been going a bit better than expected, consumer confidence is higher and the economy has been growing somewhat faster in the U.K. than expected even though the value of the pound is at an all-time low.

But Article 50 hasn’t actually been triggered yet — which means at this point, Brexit is still more talk than action. And at least as of this week, it is also a fact that seems to be lighting the fuse on London’s coming financial services fizzle.