Brexit doubts hover over London-Frankfurt stock exchange merger

Shareholders in the London Stock Exchange and Deutsche Borse were expected to back a $27 billion merger when they voted on the deal on Monday, despite fresh uncertainties surrounding the deal following the Brexit vote in the UK referendum.

London Stock Exchange
Agreement on the all-share merger would create, according to the two exchanges, the world's biggest bourse by revenue, but the referendum outcome has raised questions over headquartering the merged organisation in London following the Brexit vote. Also, there are questions over the regulatory arrangements that the UK and European Union reach following Britain's departure from the bloc.Immediately after the June 23 referendum, the two exchanges said in a statement that the result did not affect "the compelling rationale of the merger", with Joachim Faber, head of the Deutsche Borse, saying the decision made it "ever more important to maintain and foster ties between the UK and Europe".However, last week, Felix Hufeld, president of Germany's financial regulator BaFin, said the referendum result would mean that the plan for the merged company HQ to be in London would have to be scrapped and that it would now have to be based in Frankfurt."Without doubt, it is hard to imagine that the most important exchange venue in the eurozone would be steered from a headquarters outside the EU. There certainly has to be an adjustment here," he said, while conceding that BaFin does not have power to veto the deal.David Cumming, head of UK equities at Standard Life Investments, told the BBC that he believed shareholders would back the deal "because management teams from both sides are supportive".He added, "I think there will potentially be political interference from German regulators and politicians but it is not entirely clear they will scupper the deal. They don't like the fact the headquarters are here in Britain, but unless there is a significant change the deal will go ahead."Despite the doubts over future arrangements hovering over the financial sector following the referendum, the vote does not appear to have deterred the flow of start-up banks and other financial firms looking to set up in the UK.Research by PwC showed that 90 per cent of the firm's Authorisation and Start-up Unit’s clients planning to set up a British business before the referendum, were still planning to do so afterwards."Given the attractive returns achieved in the retail banking sector, the strategic direction of some incumbent global investment banks in particular, and the ongoing innovation in technology, PwC expects to see continued growth in new entrants that will focus on particular market sectors," said the company. Stephen Morse, financial services partner at PwC, added, “We are working with approximately 20 prospective new banks and other large financial services businesses looking to set up in the UK. They are a mixture of domestic UK businesses, EU-based individuals and businesses and those from around the world including from China, Turkey, Japan, South Africa, Asia and the Americas. “What is striking is the variety of new businesses that are applying for UK licenses is not just limited to 'mainstream' retail challenger banks, mortgage lenders and asset managers. There are a range of new technology-enabled banks, fintech businesses, commercial banks and even niche investment banks who have identified gaps in the market in part caused by big global banks having pulled out of some businesses over the past few years.”PwC said the positive sentiment could be put down to such factors as the view that the UK is a market which embraces innovation that has a progressive regulatory regime; has a well-established and sophisticated financial system; and a highly skilled and experienced workforce.

Read analysis of what the vote to leave the EU may mean for for the global mobility industry in Brexit is a reality – a new era for global mobility? by Relocate Global's managing editor, Fiona Murchie.

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