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France Reform Follow-Through Will Determine Scale of Brexit Business

France's government needs to deliver on its promises of reform if it is to encourage financial services firms to move operations to Paris in the wake of the U.K.'s vote to leave the EU, industry figures say.

The French capital is lagging Frankfurt in attracting banks in the post-Brexit era, as London-based financial services seek EU-based locations to continue operating within the single market. Citigroup Inc., Goldman Sachs Group Inc., Nomura Holdings Inc. and Standard Chartered Plc are among those that are thinking of making the German city their EU base.

In order to make Paris more competitive, France's new government recently announced measures designed to attract financial services, including rescinding the highest bracket of payroll tax and abolishing the extension of a financial transaction tax. But for banks, the city's image has been tarnished by strict labor laws and the difficulty experienced by past governments to change them, as well as attempts to heavily tax high earners.

Observers say France will have to work hard to prove times have changed.

"It's largely due to a perception that French governments tend to change their mind — one minute they are promising to cut taxes and reform, the next minute they want to tax financial services out of existence," said Mark Yeandle, associate director at the research firm Z/Yen Group, whose ranking of global financial centers puts Frankfurt in 23rd place and Paris in 29th.

France's new government, led by President Emmanuel Macron and Prime Minister Edouard Philippe, has set out a pro-reformist agenda designed to get the moribund economy moving again. At a conference July 11, Philippe said the government wanted Paris "to become Europe's new No. 1 financial hub after Brexit."

Small Window of Opportunity

With Brexit negotiations expected to close in 2019, the government only has a small window of opportunity to prove it is making real changes. One area it aims to reform is labor, by pushing through measures simplifying labor laws and making it easier for employers to hire and fire.

"People are banking on the fact that Macron and Philippe will implement what they have promised," said Sam Theodore, a managing director at Scope Ratings. "If you ask people why they don't want to establish their business in France, the reason they give are the labor laws. It creates a state of uncertainty."

Labor code reforms are a sign that France is listening to the needs of business, but financial firms will be wondering if it is a short-term blip or a long-term commitment, Yeandle said.

"They will want to make a decision on the long-term," he said. "Financial services hate making a decision with uncertainty."

HSBC Holdings Plc is planning to move 1,000 jobs to Paris in the event of a "hard" Brexit, or one where Britain does not secure access to the EU single market. It said it chose the French city as its EU hub because it already has a bank there following its acquisition of Crédit Commercial de France in 2000. HSBC CEO Stuart Gulliver, speaking at a conference in Paris on July 11, said France's package of reforms was positive, but that financial services companies would want to wait and see if the changes were going to stick.

"You are obviously considering whether that package of reforms is going to stay," he said. "It is very early in the new presidency and people will still have very fresh in their minds that [former President François] Hollande had declared that finance was the enemy."

It is too early to judge whether the current administration may have a second term in office, he said, noting that it often takes two terms of strong leadership to bring about significant change to an economy.

Strong Points

But Paris has more obvious strong points, such as the promise of a good quality of life, strong banking regulation and the fact that it is already home to major banks such as BNP Paribas SA and Société Générale SA. An invitation by Macron to U.S. President Donald Trump to participate in the recent Bastille Day celebrations on July 14 "sends a message to large American financial groups to consider Paris," Theodore said.

Nevertheless, Frankfurt is currently winning the race because many banks already have a base there, giving them a license to operate within the EU, said Dan Neidle, a partner at Clifford Chance in London. JPMorgan Chase & Co. CEO Jamie Dimon said his group has chosen Frankfurt because it already had a license to operate there, but did not rule out having mini-hubs throughout the bloc.

And given that Brexit negotiations are still ongoing, many financial services firms will wait to see what the final outcome will be before deciding on an EU location.

"Financial services are not going to spend huge amounts of money until they know what is going on; it is very hard to predict what is going to happen," Yeandle said.