Britain’s plan to leave the European Union may hurt London’s position as a global financial hub, in addition to unintended effects for UK business and finance more generally. Britain will hold a referendum on June 23rd to determine whether or not to move forward with the plan, put forward by politicians seeking greater economic sovereignty from the EU. Issues range from concerns over immigration, to Eurozone bailouts and excessive regulation. The conservatives who support such a move for Britain seek to free business in the UK from what they consider excessive bureaucracy wielded by EU officials in Brussels.

However, the move out of the EU may not have the desired effect on the economy and regulatory sovereignty the conservatives are seeking – especially in the city of London, which is home to 40 percent of the world’s top 250 companies with headquarters in Europe. The city is attractive as a business hub due to a number of factors, including an educated talent pool, favorable tax system, and convenient location and time zone. However, much of this draw is also owed to its access to the EU market, the world’s single largest consumer market. The passport system allows UK based businesses to do business in EU’s member states without seeking individual authorizations. In order to keep its access to this market after leaving the EU, the UK would have to demonstrate equivalence to the EU regulatory framework. This could mean Britain would still ultimately be beholden to EU regulations, but would not have a hand in shaping such policies.

UK based companies would have to open branches in locations under EU jurisdiction in order to access the market of EU retail investors. Foreign, non-EU companies looking to do business in London and the rest of the UK would be forced to comply with the regulatory framework of their home country, the country hosting their EU branch, and of the UK itself. This would make it more practical to establish headquarters in a European city outside the UK.
An exit from the EU on the part of Britain would likely result in the weakening of London as a European financial center, and lessen London’s ability to attract foreign companies who could do business more easily in cities like Dublin, Paris, Frankfurt or Luxembourg. In addition, little regulatory sovereignty would be gained, since equivalency to EU regulations would be necessary. Over time, these changes could potentially weaken the UK and London’s role as a financial hub.

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