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Future of the City: Where did all the jobs go?

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For months after the Brexit referendum, Japanese bankers were invited on tours of Frankfurt. They would take in a football match and meet one of the local club’s star players: Makoto Hasebe, former captain of Japan’s national team.

Impressed by the German city’s clean air, green spaces and family-friendly atmosphere, most of the bankers switched their plans to establish a post-Brexit EU base in Amsterdam and opted for Frankfurt instead.

“One of the biggest issues we have with people is to get them here to see it and then they are pleasantly surprised by what they find,” said Hubertus Väth, head of the Frankfurt Main Finance lobby group.

Mr Väth admits, however, that his headline-grabbing prediction on the day after the Brexit referendum in June 2016 — that 10,000 jobs would shift from London to Frankfurt — has failed to materialise. Instead, he now believes Brexit created about 3,000 extra jobs in the German financial capital by June, including related consultants and IT services providers.

“We expect another 1,000 jobs to come in the following months, which may extend into early next year as 500 jobs are still being negotiated with regulators because of the Covid-19 situation,” said Mr Väth. “The traders have been the big holdouts so far.”

When Britain voted to leave the EU — a process culminating in the end of the transition period on December 31 — it prompted a scramble by rival financial centres across Europe. They were competing to attract the many jobs and assets expected to leave London as Brexit threatened the UK’s access to the bloc’s single market.

La Défense business district west of Paris © Christophe Archambault/AFP/Getty

France, Italy, the Netherlands and Spain introduced special tax breaks for wealthy financiers relocating to their countries. Germany changed its rigid labour law to make it easier for companies to fire highly paid “risk-takers” including traders in investment banks.

Emmanuel Macron, France’s president, even welcomed 140 global industry and banking bosses to dinner at the Palace of Versailles in 2018, urging them in English to “Choose France”.

Despite all this courting, the expected flood of bankers leaving London has so far proved to be more of a trickle. And the spoils are spread between many different cities. Most investment bankers and traders headed to Frankfurt and Paris, while asset managers favoured Luxembourg, and back-office operations have gone to Dublin and Warsaw.

France’s President Emmanuel Macron (centre right) and Bill McDermott, chief executive of SAP (centre left), during the “Choose France” summit at the Palace of Versailles © Thibault Camus/AFP/Getty

Christian Noyer, a former French central bank governor, said Brexit would herald a return to a time before “Big Bang” — the deregulation of the City of London in the 1980s — when finance was much less concentrated in one place.

“If we go back 30, 40 years, there was a time when the financial centre was much less concentrated in London . . . when banks had more staff in Paris than in London,” he said. “The moves might have been slowed down by Covid-19, but we are going to have lots more of these traders moving at the end of this year and all through next year.”

Future of the City

In a series of articles, the FT examines how London’s financial centre will fare in the decades ahead as Brexit negotiations reach their climax

French bank Société Générale has moved about 300 jobs out of London. “All banks had to rebalance,” said Frédéric Oudéa, its chief executive. “The ones that had all their trading operations in London had to repatriate people to deal with eurozone-related activities. There was a certain shift, but the magnitude has been relatively moderate.”

Doomsday predictions in a London Stock Exchange survey in 2016 estimated that 232,000 financial services jobs could leave the UK as a result of Brexit.

Not only have far fewer jobs left the country, but many footloose financiers continue to operate at least partially in London — commuting back and forth each week between the city and the continent, at least before the pandemic complicated travel.

David Benamou, chief investment officer at French asset manager Axiom Alternative Investments, set up a UK offshoot of the company in 2013. He has lived in London ever since, while also spending one night a week in a hotel next to its Paris headquarters.

About 3,500 financiers have moved to the French capital since the Brexit vote, according to the Paris Europlace lobby group, including senior executives from Bank of America, JPMorgan and BlackRock. But Mr Benamou is among those betting that the City will remain a big enough market with enough talent to make sticking around worthwhile.

“It took 20 years to build up London as the centre of world finance. So, tearing it down . . . I find it hard to believe that can take place in less than 10 years,” he said.

Yet Mr Benamou believes that instead of setting up in London and expanding into Europe, the opposite is happening. “Now if I had to start a business from zero, of course I would start from the continent, because there wouldn’t be any point starting from the UK,” he said.

The fountain in Piazza Gae Aulenti square in Milan © Emanuele Cremaschi/Getty

Davide Serra, founder of asset manager Algebris Investments and a big donor to the Remain campaign, remembers his son’s disappointment shortly after Brexit. This is partly why he relocated from London to Milan with his family in 2018.

“He told me he was sad and felt lost because we are Europeans. Through that feeling of being ripped apart I understood I wanted my British kids to have an international experience,” Mr Serra said. While Algebris has offices in Milan, Rome, Luxembourg and Dublin, he still flies back and forth to its London base for a few days each month, “Covid permitting”.

People moving to Frankfurt often start off by commuting back to the UK at the weekends, according to Daniel Ritter, executive partner at Von Poll, a German estate agent. “A lot of buildings here were refurbished as serviced apartments, as many of the bankers moving here leave their family in London and fly back there on Fridays,” he said.

After the Brexit vote, there were fears that other European cities would lack capacity in housing and schools to cope with the new arrivals. But Paul Fochtman, headmaster of Frankfurt International School, has only seen a steady trickle of Brexit-related admissions, which he estimated at just under 100 in total.

The Frankfurt skyline as seen from the 15th floor of the European Central Bank headquarters © Alex Kraus/Bloomberg

“We’ve always had people moving from London but there is a bit more urgency now,” he said.

Brexit also boosted applications from London for places at the bilingual École Jeannine Manuel in Paris, from 50-60 a year before Brexit to a peak of 264 last year. There was a dip in 2020, but Bernard Manuel, the school’s headmaster, said: “We see a substantial increase next year and many, many phone calls from major banks . . . one bank just told us they have 70 kids that need places.”

Jean Pierre Mustier, chief executive of Italian bank UniCredit, said it suited lenders to relocate some staff out of London after Brexit because of the UK capital’s high costs. “There will be an adjustment — it’s gravity at work,” he said. “Probably a lot of banks will look to relocate French staff to France, Italian teams to Italy and German teams to Germany.”

Deutsche Bank’s twin tower headquarters, beside the Frankfurter Sparkasse Tower in Frankfurt’s financial district © Alex Kraus/Bloomberg

More than 7,000 wealthy Italian expats chose to come back between 2017 and 2019, and benefited from a 50 per cent tax exemption on their Italian income, according to data from the tax administration. The exemption was increased to 70 per cent from this year. 

Another benefit, under which individuals pay a flat yearly €100k on their foreign income, has attracted footballers like Cristiano Ronaldo and private equity executives earning large sums of “carried interest” from buyout funds.

Luigi de Vecchi, Citigroup’s corporate and investment banking chairman for continental Europe, relocated from Milan to Paris three years ago. However, he has spent most of 2020 in his home country of Italy because of the pandemic. From here he watched a flurry of new arrivals. 

“I feel like a real-estate agency lately, I’ve had around 30 acquaintances ask me for advice on where to live in Italy,” he said. “People are willing to pay rentals that might be peanuts for the London market but are very high for Italy.”

With many banks allowing most staff to work remotely during the Covid-19 pandemic, some question whether they still need to move for Brexit. Yet supervisors at the European Central Bank suspect that lenders are dragging their heels on relocating staff and using coronavirus as an excuse. The ECB warned last month: “Remote working arrangements do not change the fundamental need to relocate staff to the EU.”

Even Deutsche Bank, which initially identified 4,000 jobs at risk of moving, has only shifted about 100 positions out of London to Frankfurt, with another 200 to 300 to follow. The timing and exact number of the extra moves hinges on regulatory and political decisions.

Frankfurt-based public lender Helaba estimates that about 1,500 positions have been moved to the city, and expects 2,000 to follow over the next two years. But that will not offset the jobs Frankfurt-based lenders are axing: overall banking jobs in the city are expected to fall 3 per cent to below 63,000.

“This is very regrettable,” said Helaba’s chief economist Gertrud Traud. “Banks that have to move jobs scrutinise very closely if they really do need those positions at all in the future.”

Additional reporting by Laura Noonan in New York, Owen Walker in London and Olaf Storbeck in Frankfurt



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Analysis

Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend

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Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.

BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.

“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.

“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”

Column chart of By downloads (% of total) showing Top US mobile payment solution apps

BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.

Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.

The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.

Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.

The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.

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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.

The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.

“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.

Square’s gross payment volume

Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.

“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”

Square’s entry into BNPL comes as the sector is becoming increasingly competitive.

Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.

Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.

PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.

Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.

“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”

A bigger threat still is the sector’s immature and inconsistent regulatory environment.

“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”

Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.

The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.

In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.

Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”

Additional reporting by Richard Milne



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UK pushes floating wind farms in drive to meet climate targets

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In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.

Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.

Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.

Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.

Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.

Map showing the location of Kincardine offshore floating wind farm, offshore from Aberdeen on Scotland's east coast

Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.

Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.

The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.

Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.

The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.

A Norwegian flag flies from a boat near the assembly site of offshore floating wind turbines in the Hywind pilot park, operated by Equinor
Norway’s Equinor is among the companies competing to build floating turbines in Scottish waters © Carina Johansen/Bloomberg

UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050. 

Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.

WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.

Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.

Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.

An offshore wind turbine off the coast of Fukushima, Japan
A wind turbine off the coast of the town of Naraha in Japan’s Fukushima prefecture. Japan is one of the countries pursuing floating technology © Yoshikazu Tsuno/AFP/Getty Images

Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.

The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.

“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.

Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.

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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.

Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers. 

The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.

The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.

But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.

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China tech crackdown claims ETF victims

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Exchange traded funds updates

Beijing’s regulatory crackdown on some of its biggest companies in technology and education has delivered a bruising blow to highly specialised China-focused exchange traded funds.

Broad-based tech ETFs have sailed through virtually unscathed, but some narrowly focused thematic instruments have taken a beating. Among those most affected, the KraneShares CSI China Internet ETF (KWEB) has nearly halved in value since its peak in February.

Some ETF buyers are hunting specifically for targeted strategies, despite the risks. But Kenneth Lamont, senior fund analyst at Morningstar, said this highlights the potential drawbacks of tracking a narrow theme without the flexibility to shift tactics.

“The [passive thematic] strategy has no way to quickly react to bad news and will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks,” Lamont said.

Line chart of Total returns, year to date (rebased) showing Narrow vs broad tech ETF

He noted that for the KraneShares ETF, one Chinese education group alone — TAL Education Group — was responsible for knocking 2.8 percentage points off performance from the end of June.

Global X Education ETF (EDUT), which has a large exposure to the Chinese online education sector, was also badly affected.

Actively managed ETFs, such as Ark Invest’s ARKK flagship Innovation fund, can react more quickly. After voicing her optimism for the prospects for China’s tech disrupters earlier this year, Cathie Wood, Ark’s chief executive, shed millions of dollars worth of shares in four China-domiciled companies.

Line chart of Number of shares held (millions) showing ARKK has been selling Chinese technology holdings

Investors in ARKK have not been rewarded as well as those who simply put their money in broadest based funds such as the Vanguard Total World Stock Index Fund ETF (VT), but they have still managed to ride out the China tech storm far better than more exposed counterparts.

Line chart of Returns, year to date (rebased) showing ARKK vs Vanguard Total World Stock ETF (VT)

Some investors insist Chinese investments can bounce back. Mark Martyrossian, chief executive of UK-based Aubrey Capital Management, said he believed many of the affected tech companies would maintain their market leadership.

“The gravy train may have slowed but you disembark at your peril,’ Martyrossian said.

Lamont said badly hit funds had suffered such losses because they were doing exactly what they had promised to do — provide narrow exposure.

More nimble active investment strategies also face their own challenges, said Elisabeth Kashner, director of global fund analytics at FactSet. “Active managers may successfully anticipate market reversals, but they can also miss them, sometimes seriously tanking returns,” she said. “Some people can be skilful and some people can be lucky and if you’re lucky and skilful in one period you might be lucky and skilful in the next, but you might not.”

Additional reporting by Steve Johnson

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