London’s potential loss could be Dublin’s gain in Brexit scenario

The UK’s struggle with regulatory issues on leaving the EU would benefit financial trading platforms here, writes John Whelan.

Ireland’s services exports last year grew by 15% to a new high of €116.8bn.

This burgeoning sector relies heavily on the UK, which buys 20% of all our services output.

Many services exporters are reviewing their strategy ahead of a potential UK exit from the EU in a few months’ time.

Inevitably, the prospect of any trading partner moving outside the single EU market will create difficulties; this will be particularly the case for Irish exporters servicing their UK customers.

However, some sectors will gain market share globally, as UK competitors struggle with regulatory and non-tariff issues if they exit the EU.

In particular, Irish financial and insurance services are expected to gain, as a significant amount of trade currently booked in London is likely to leave if the UK exits.

The International Financial Services Sector (IFSC) is a generic term referring to Ireland’s internationally trading financial and insurance services industries, and it employs 35,000 people directly in the Republic of Ireland, two thirds of them in the Dublin region.

It comprises 400 internationally- and Irish-owned cross-border financial services businesses, which operate in 1,000 corporate entities. Last year, companies within the IFSC exported €31bn in services, with 17% of this going to customers in the UK.

Ireland is the fourth-largest exporter of financial services within the EU.

More than 50% of the world’s leading financial services firms have subsidiaries in Dublin, and will be anxious to use their bases here to offset any downside to trading through London, in the event of a Brexit.

The value of investment funds domiciled or administered in Ireland is now €3.2trn, and these funds are managed by 900 asset managers from 50 countries.

After the general election in the UK last year, London was ranked the world’s leading financial centre, according to a detailed study of 86 cities. Dublin was ranked 46th, moving up six places.

Michael Mainelli, chairman of the think-tank Z/Yen, which produced the report, attributed London’s better showing to reduced uncertainty following the surprise win for the Conservatives.

However, uncertainty over the outcome of the Brexit vote has brought turmoil to the London market this year.

Mr Mainelli highlighted Dublin, which had “a hard time pulling away from the crisis”.

“There’s a lot of confidence that Dublin is out there to grab business in wholesale financial markets,” he said. He also said there was a view that the city would benefit if Britain voted to leave the EU.

A number of London’s trading sectors will be under threat if the UK leaves the EU:

• Foreign currency trading, where the ‘’vast majority’’ of euro–dollar trading takes place;
• Investment banking, which takes advantage of its EU membership to ‘passport’ banking services around the EU member countries, without having to have a fully-fledged local operation in each location;
• The insurance sector, which writes business from London, again with a passport–free facility across the EU;
• The asset-management sector, where the EU single market is the most dynamic area of financial services and where London has been a major player.

In this latter sector, one particular cross-border product, called Ucits — which stands for ‘undertakings for collective investment in transferable securities’ — has grown dramatically in recent years. London and Dublin are neck-and-neck as the domicile for Ucits, beaten only by Luxembourg, which, like Ireland, offers tax advantages.

In the event of Brexit, there would be strong pressure to move the euro-dollar foreign-exchange trading from London to the other major financial centres in Frankfurt and Paris, with Dublin also expected to see an increase.

Investment banking prospered enormously in London when the single currency was introduced in 1999 with the elimination of cumbersome, fragmented, cross-border regulations. This gain will be jeopardised by Brexit.

If insurance underwriters do not have the freedom to write cross-border business, as they now do, and have to set up local operations across the EU again, there will be competitive disadvantages for those located in London.

For those in the Ucits sector, the risk is even clearer; Brexit would push the UK portion of the business, which was worth more than €1trn last year, to Dublin or Luxemburg.

John Whelan is a leading consultant on international trade.