As British banks are being told to “prepare for the worst”, Paris, Amsterdam, Milan and Frankfurt are all vying for a piece of the Brexit pie.
Frankfurt recently muscled in with plans to charm big banks into relocating to the German hub by adjusting employment law so it is easier to fire top earners. One top city lawyer described this as a “wise move”.
In the UK, financial firms enjoy lax employment law for those on the largest salaries meaning they can hire top talent when the markets are booming, and quickly cut back when times get tough.
German employment law gives workers more protection regardless of salary. Additionally, workers’ councils in Germany make recruitment difficult and employees can only resign within dedicated periods each quarter. This makes it hard for banks to respond dynamically to changes that affect the need to hire or fire.
If the legislation was adjusted, this could all change. Those earning over €300,000 ($342,000) a year could have an easier dismissal included in their employment contract in exchange for pre-agreed severance pay, for example.
This is likely to be similar to the existing labour law exemption for managing directors from the German Dismissal Protection Act, says Suzanne Horne, head of the international employment practice at law firm Paul Hastings.
“One of the HR issues that the banks have been wrestling with as part of their Brexit insulation and response strategies is the contrast in labour laws in other EU jurisdictions. Put simply, it is harder and more expensive to terminate employees in Frankfurt or Paris than the UK, other than in exceptional circumstances,” Horne tells GTNews.
“Much of the negative impact of Brexit will be felt even if the Brexit is soft or abandoned. Companies and people will have moved.”
“The news that Frankfurt is offering banks an exemption for ‘risk takers’ from some of these strong protective rules is an incentive to the banks,” she says.
Indeed, Clive O’Connell, partner and head of insurance and reinsurance at law firm McCarthy Denning, says that companies cannot afford to wait and see what the outcome of the Brexit negotiations are before making contingency plans.
The result of the negotiations leading up to Brexit will not be known until shortly before March 2019, when the UK will leave the EU. As and when agreements are reached on the individual issues, the whole agreement will need to be ratified by each EU27 country (the EU’s member countries excluding the UK) and the UK Parliament, explains O’Connell.
“Companies and individuals cannot wait and see. They must prepare for the worst now. This means that much of the negative impact of Brexit will be felt even if the Brexit is soft or abandoned. Companies and people will have moved,” he says.
Some companies have already started moving operations out of London. Lloyd’s of London is relocating part of its operations to Brussels. British bank Barclays has chosen Dublin as its new European hub and Goldman Sachs is closing some of its hedge fund operations in London and moving the staff to New York. HSBC chief executive Stuart Gulliver said that around 1000 staff would move to Paris in a ‘hard Brexit’ scenario.
Picking over the Brexit bones
Banks and funds tend to be particularly interested in Frankfurt. Insurers are typically looking for ‘neutral’ and ‘central’ bases, such as Luxembourg or Brussels, or are considering Dublin or Malta for their English language and law.
It’s unclear how much control will have to be exercised in these hubs, how many feet will be needed on the ground and what type of feet, says O’Connell. “This move by Frankfurt is a wise step to encourage movement of companies and people to the city. No doubt other European cities will follow suit.”
Paris is one of those joining the scramble.
The French capital is an easy distance from London with plenty of culture to lure workers. In his presidential campaign, French President Emmanuel Macron promised radical reforms to France’s debilitating labour laws as well as more flexible working hours alongside other plans to rejuvenate the French economy.
“Policymakers in Frankfurt are following Macron’s lead by contemplating easing labour laws to lure financial services executives from London,” says Alex Howard-Keyes, investment banking partner at human capital consultancy Alderbrooke. “That said, Frankfurt has stolen a march on Paris as the destination of choice for any banks looking to relocate operations as it’s considered a relative safe-haven in an unstable Europe.”
But as with Macron’s attempt to charm bankers, Howard-Keyes believes Frankfurt’s proposed employment law reforms will give little comfort to banks until they are supported by an actual legislative change. “Until then, there may be a modest upscaling of offices in Frankfurt but I believe London retains its status as the financial centre of Europe,” he adds.
Will employees be enamoured?
Attracting financial services by relaxing employment law is not the end of the story either. “A key measure of any successful Brexit relocation will be whether the banks can retain their top talent through the relocation and those talented “risk takers” may be less enamoured with this offer. From an employee engagement perspective, if they are required to relocate why shouldn’t they be entitled to the same legal protections in that jurisdiction?” asks Horne.
“Post-Brexit, there is certain to be a transition period where those relocating employees will forum shop to get the best legal protection if their employment does come to an end and, if this new exemption does come into effect, satellite litigation as to whether individuals fall within this exemption,” she adds.
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