The post-Brexit battle that's only just getting started
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The City was largely overlooked in the Brexit talks. That means an almighty struggle is about to kick off, as London tries to make the most of new opportunities while facing a rearguard action against a covetous Europe. SUNA ERDEM reports.
Thirty-five years ago, Margaret Thatcher gave us the Big Bang. Deregulation ushered in the Golden Age of the City of London, bringing in more money, more business, a wider range of players and a whole new roster of satirical characters– Harry Enfield’s Loadsamoney, barrow boys, Nigel Farage...
Now her disciples are threatening her lucrative legacy – with a rushed bare-bones trade deal with the European Union and nothing yet for Britain’s all-important financial services. Have the Brexit Tories shafted the City?
As the UK left the EU’s embrace on December 31, the media was awash with apocalyptic headlines of the City being “hung out to dry” and “thrown to the lions”.
The Thatcherite chancellor Rishi Sunak promised a Big Bang 2.0 of his own following the Brexit 'liberation'. But so far, the bang seems to be all on the other side.
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On January 4, the first business day after the transition period ended, 6.3 billion euros in daily stock trades moved to EU locations. Platforms dealing with European stocks, such as Cboe Europe and Aquis Exchange Plc are among those moving to locations such as Paris and Amsterdam, reversing a trend that began in the 1980s when London became an unstoppable centre for equities trading.
“It’s an embarrassment when you’re trying to say to the public what a great thing this is…and the very first thing you do is lose almost 100% of the city’s trading in European equities,” Aquis Chief Executive Alasdair Haynes told me. “Financial services has a trade surplus of £60 billion in the United Kingdom. They should have been part of a trade deal.”
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The so-called jobs Brexodus has been going on for a while. The consultancy company EY said at the end of last year that already 7,500 jobs and 1.2 trillion pounds had moved to Europe as a result of Brexit – and that this might be only the beginning. Estimates for medium term job moves range from 35,000 upwards. According to JP Morgan’s boss in France, there was virtually “nil” chance of moving even one banking job from London to Paris before the 2016 referendum.
When Boris Johnson said: “Perhaps we didn’t get quite as much as we would have hoped” on financial services, it was an understatement of epic proportions. Is this what he meant by “f**k business”?
Financial services in the UK employ more than a million people, account for around 7% of the economy and over a tenth of the country’s tax revenue – it’s extraordinary that such an important sector feels sold out after a Brexit championed by supposed economic libertarians. The financial services industry is 200 times the size of fishing – which at least it had its day in the limelight.
With bankers unloved since at least the 2008 global crisis - and anyway a bunch of Remoaners - maybe they were always unlikely to be granted much love by the government. Maybe ministers felt City Big Boys should be able to cope. In any case, once you decide to leave the single market and end free movement of people, as Theresa May announced in 2016, there’s scant possibility of an effective financial services deal.
But this does seem like a bit of an own goal just the same, especially given the hit the economy is getting due to the pandemic.
So far the moves have largely been related to trade in European shares – which the EU say must be conducted in the bloc – and the number of jobs moving is dwarfed by those still in place. EU share trading in the UK produced three billion pounds of tax last year. By comparison, the Square Mile as a whole generated 75 billion pounds in tax in 2019, according to the City of London Corporation.
The issue is not so much what has gone – damaging as it is – but the uncertainty that remains. The UK and the EU won’t produce a memorandum of understanding on financial services until next month. London lost its 'passporting' rights, which had allowed banks and trading platforms to offer financial services across the EU, so the future relationship will be complicated and piecemeal, based on frameworks for ‘third countries’ such as the US.
The EU is determined that those leaving the bloc can’t 'cherry pick' the best bits, and is playing tough. France, now the largest capital market in the EU, leads countries wanting to grab a larger slice of the City’s asset management business.
Thanks to painstaking, expensive preparation, bankers and asset managers were not disrupted in the first days of full Brexit, but wait nervously as the EU considers tighter rules in areas including 'delegation' of fund management. This could restrict hedge funds being managed from locations outside the EU, such as London, and potentially affect the entire industry, including US giant BlackRock. In Brussels, Markus Ferber, a senior MEP, said in late January that the question of whether to tighten delegation rules depends on how far the UK departs from EU standards.
A worrying Bloomberg report, citing dozens of officials at global institutions, warns that the initial exodus of traders and salespeople could be followed by a wave of high-flying dealmakers, who advise on strategy, mergers, and raising capital.
Brussels has also laid claim to euro-based derivatives on the grounds of financial stability – some of this has even gone to the United States, which currently has more EU access than us. This risks trillions of pounds of existing UK trade.
“They’re going to look at clearing, at derivatives, at other trading, and I think if they succeed in that, then London has a real problem,” Haynes said. London needs to fight back, he said, by creating an attractive environment for entrepreneurs with careful incentives on tax, subsidies and government support, and lure increasingly empowered non-professional investors too.
If Europe can capitalise on London’s woes, it will. EU capitals have long been covetous of the UK’s financial primacy and the pressure on banks to move to the continent is now very strong. At the release of a European Commission paper on promoting global trade of the euro, Ferber urged a “masterplan that helps key financial sector businesses move from the United Kingdom to the European Union”.
The Holy Grail for UK financial services now would be for the EU to grant 'equivalence', which gives market access to banks, insurers and other financial firms if each side recognises the others’ regulations as equally strict. The UK pre-emptively offered equivalence to the EU, but apart from time-limited equivalence in two areas – clearing and settlement– the EU has not reciprocated.
Financially, equivalence would help both sides – but politically it’s tricky. The recent vaccine row and fractious Brexit talks hardly incentivised Brussels to give London something that is entirely in its gift.
The value of equivalence depends on the strings attached. Bank of England governor Andrew Bailey said it would be “problematic” to sign up if it meant Brussels could dictate standards to the UK. Being able to set its own rules is crucial to London attracting new business.
A New Financial think tank report maintains that December’s deal leaves the UK in worse shape than Australia - the government euphemism for no-deal - which has equivalence in 19 areas (Canada has 20 and the US 23). Even so, its founder, William Wright, isn’t preaching pessimism.
“Brexit dents but does not fatally undermine the many factors that have helped make London a dominant financial centre,” Wright said. The UK should cut its losses, diverge selectively on regulations and develop trade in financial services and closer partnerships with markets in the US, Switzerland, and Asia. “The UK has an opportunity and imperative to recalibrate and reinvigorate its own markets and it will have to work hard in the coming years to avoid structural damage to the City’s international position.”
One early decision for London was to reinstate trading in Swiss shares – an EU ban in a trade talks row in 2019 lost the UK some 1.3 billion euros a day. Much else is vague. Stock market listing rules could be relaxed, and Sunak has suggested reforms designed to take a larger chunk of the growing green finance and fintech sectors.
London still has several advantages as an important global capital market, including language, laws, history and a skilled workforce concentrated around a definable hub. With cities such as Paris, Frankfurt, Milan, Madrid and Amsterdam vying for business, the EU has no single alternative.
Yet focusing on squabbling between London and the EU ignores what both stand to lose. Without the UK, the EU is no longer the world’s second largest capital market and will miss the financial experience of the UK. The UK relinquishes its outsize influence in the EU and risks its role as a gateway to EU markets. They need to work together. Business lost to the US or Asia makes both jurisdictions look bad.
What if the gamble doesn’t pay off? Paul Myners, a former City minister, has predicted a profound change to the City over the next 10 years as a result of the UK’s “dismissive” negotiating strategy, evoking a gradual diminishing of funds and importance.
Whither Loadsamoney then? Or, for a more current example, could the oversexed, overworked rookies in the BBC’s Industry be swapping their City flats for Parisian appartements and a taste for the Cinq à sept?
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