One way or another, in all likelihood Brexit means fewer jobs in the UK's financial sector than would otherwise be so. In the worst case, we might see a 'big bang', in which large banks move key operations overseas lock stock and barrel, leaving those employees who cannot or will not follow them redundant. In the best case, it is still likely that in ten years' time, things which might have happened in London will have happened somewhere else, leaving a gap in the domestic labour market where thousands of well-paid, middle-class jobs could have been expected to be. And the numbers involved are not trivial – JP Morgan, for example, employs twice as many people in London and the south-east as Nissan does in Sunderland.
The missing jobs might not be the front office ones which people associate with banking. The high-profile financiers and money managers have jobs which are embedded in a set of social relationships which are hard to transfer, and so they will probably stay. But the old front-office/back-office distinction is less relevant than it used to be.
JP Morgan employs twice as many people in London and the south-east as Nissan does in Sunderland
The designers of algorithmic trading systems are not 'front office' in the traditional sense, but they are key employees, and their human capital is skills-based, not social in nature. And even the managers of payment and settlement systems and the administrators of credit scoring models are an important part of the UK's managerial class (one of them, having made an earlier career transition, is currently our prime minister).
The Silver Linings Dealbook
If one felt optimistic, one might see this as an opportunity to rebalance the UK economy away from financial services and towards technology and manufacturing. Researchers have been suggesting for years that a crucial bottleneck for innovation in British industry has been a management culture that systematically fails to support it.
Britain has never been short of top-quality scientists and innovative designers, but it has often seemed to lack people with the ability to administer the process of getting new ideas into operation. Perhaps people have been looking for the 'brain drain' from the financial sector in the wrong place; it is not so much that gifted physicists have had their heads turned by derivatives structuring, as that potentially excellent middle managers have gone through the PPE, Law and City route rather than into engineering and management. The inventor of nuclear fusion for the next millennium is not lost in a hedge fund somewhere, but the general manager of her factory might be.
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This would be the optimistic conclusion, because it presumes that there is a general skill of management competence, and that Britain's productivity problems are rooted in the tendency of this form of human capital to be directed into the management of derivatives structurers rather than machine operators. Brexit, then, or any similar structural change in the size of the financial industry, would facilitate a redeployment of this scarce form of human capital into industries which arguably have a brighter long-term future.
Silver linings, but no silver bullets
The 'silver lining' argument might even work in some niches. A securities trading system is basically a very fast, very secure, very reliable telecoms system. Banks have always been in the forefront of innovation in fast and secure communications, and continue to make the pace in blockchain and encryption. The designers of high-speed training systems have sucked in a significant proportion of the available talent pool for machine learning and pattern recognition, and put it to work on entirely proprietary and secret projects. Opening up the advances made by these people would be a genuine technological dividend.
But as far as the economy as a whole is concerned, one only has to imagine the best case scenario – of a mediocre engineering firm getting a recently redundant Head of Interest Rate Options dropped into the manager's office and quickly becoming a world beater – to begin to suspect it is a pipe dream.
The highly productive employees of the UK financial sector are only highly productive because of their current unique structure
The skill of management is much too complicated to be thought of as a single human capital factor, and the middle managers of the financial sector owe their success to structural factors more than individual ones. The City has been a success story for the UK because it has competed at the highest level internationally, with few or no protections, and has adapted to survive. As the proverb goes, when a management team with a good reputation takes over a company with a bad reputation, it is usually the company's reputation that survives.
The depressing prospect, then, is that the highly productive employees of the UK financial sector are only highly productive because of the unique structure and architecture which they are currently fitted into, and that if and when they leave this structure, they will be no better than the rest of us. If the UK is to rebalance away from financial services, it is going to have to do it the hard way – by building up the kind of incentives and competitiveness which characterised the City at its height, from the ground up.