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The Brexit double fault

'Wimbledonisation' helped the City of London become Europe’s financial capital. But leaving the EU has been much less of an advantage

Image: The New European

Wimbledon’s annual tennis tournament may, you might think, have little to do with financial services, the City of London and Brexit – but it does. Because long before Andy Murray finally lifted the men’s title in 2013, Wimbledonisation had entered the dictionary.

It describes what happened to the City of London after the “Big Bang” of 1986. As a result of that moment of Thatcherite financial deregulation, almost every British-owned finance house, stockbroker and dealer was bought up by foreign firms, desperate to be part of the boom. Pretty soon the City was dominated by Japanese, American, German, Swiss and French-owned companies.

People worried desperately that while the UK had become the financial capital of Europe, hardly any of the big players were actually British. But in the end, it was decided this did not matter. Just like the Wimbledon tennis tournament, the UK had created the facilities, built up its reputation, created an attractive venue and established the rules of the game. If foreigners were keen to play here and were better at playing here, that was good enough.

It only mattered that they lived in London, worked in London and, most importantly, paid their taxes in London.

That is a major reason why one of the biggest dangers of Brexit for the UK is not the decline in trade in physical goods with the continent, but the hit to services, and especially financial services. Unlike goods, they create a massive trade surplus for Britain. The UK has a natural advantage in financial services, and as a result the City is an exporting superpower. It pays 5% of all tax in the UK.

But the City of London did not attract all that foreign investment simply because of its own charms. It also did very well out of Britain’s membership of the EU, using it to become the undisputed base for European finance. Deregulation and the Big Bang came just in time for the world’s financial services companies to base themselves in London, in order to take advantage of the newly created single market.

The City was so successful that it even became the centre for financial transactions carried out in euros, despite the fact that the UK was, and was never going to be, a member of the eurozone. The UK won a famous court case at the European court of justice (ECJ) to prevent it being discriminated against by eurozone countries that wanted that highly lucrative business for themselves. This is a victory that Brexit threw away.

The City’s fortune, therefore, is not guaranteed, and it has rivals on the continent from Amsterdam to Zurich that have long regarded the City with envy. Brexit has given them the opportunity they wanted to slowly and surely draw up plans to undermine the wealth and success of the City.

Brexit has hurt the UK’s financial services in many ways, and the most important is that the City has lost its right to do business across the EU, unless a firm happens to have a subsidiary in the EU. The rather naive hope was that this could be got round by a method known as “brass plating” – putting up a brass plate outside a tiny office in Paris or Dublin and then continuing as before, passing all the business through London.

Unsurprisingly, Europe’s governments and their regulators decided that, if they faced the prospect of having to bail out UK banks and other firms now apparently working in their countries, they wanted the capital, cash, compliance departments, auditors and therefore jobs in their countries too. As a result, £900bn has been transferred from the City to the EU and the City has lost around 7,400 staff to the continent, all because of Brexit. It is better than most predicted, but that is 7,400 highly paid jobs that should be in London.

It is also the reversal of a very long-running trend that worked to the great advantage of the UK. The single market allowed for the free movement of goods, services, capital and people throughout the EU. The last three of these played perfectly into the hands of the City. Why keep large offices in Rome, Madrid, Copenhagen and a dozen other European cities when you could move everyone to one large office in the Docklands? From there they could visit their customers when they needed to, but the jobs, money and people would all remain in one place – the City.

The savings were huge, the concentration of capital massive and the taxes were all paid in the UK. This happened all because London was the way into Europe for thousands of firms. As a result of Brexit, that trend has gone into reverse.

Andrew Pilgrim, a partner at the international accounting firm EY (formerly Ernst & Young) who is its UK government and financial services leader, has been monitoring the consequences of Brexit. He says: “Many firms were very happy having their European HQs in London and the ability to serve their customers from the UK. To change that was expensive and required a lot of time and investment and people to do it. Once it was done, it is not easy to unwind, that money and cost and time has been expended.”

Luckily for the UK, the City is not just a European centre for finance. It is a world player. But having lost the ease with which it used to do business in Europe, it now has to work even harder to seek out new markets.

As Nicola Watkinson, managing director of international trade and investment at TheCityUK, an industry-led body representing UK-based financial services, asks: “How does the UK grow and reposition itself in the international markets? When I was sitting in New York a lot of businesses would look at the UK and it had that strapline ‘the gateway to Europe’. While that relationship remains important, post-Brexit, the UK has redefined itself, focusing on growing its business with other markets like the US and high-growth markets like Asia.”

The City is still the biggest and best financial centre in Europe, but its attractiveness is being undermined. The latest research for TheCityUK by EY shows its lead has narrowed. “The gap between the UK and second-placed France closed significantly in 2021. France is an increasingly popular country for financial services investment and these results should signal to the UK that more needs to be done to retain its leading position,” it reports.

Amsterdam is also doing its best to poach business from the City, and it ended 2021 as Europe’s top sharetrading venue. This was a position long held by London, which it lost despite efforts to make the UK’s equity markets more attractive. When the UK left the EU, euro-denominated share trading by EU investors had to stop in Britain. Amsterdam simply snaffled it all up.

Of course, one way to increase London’s attractiveness has been for the government to abolish the cap on bankers’ bonuses, forgetting that it was out-of-control bankers who nearly collapsed the world’s financial system in 2008, something for which we are all still paying.

If the Liz Truss wing of the Tory Party had got its way, that would have been followed by a bonfire of regulations, rules and controls so that the City could boom.

There is, however, a major problem with this plan. The UK’s financial services have lost their right to “passporting” across the EU. Under the single market’s rules, UK regulations were accepted across the continent, giving the City the ability to trade seamlessly across the 28 countries.

Now those regulations only count as “equivalent” to EU legislation: that is, they are good enough for now, but mess with them and the EU can and will cut you off from your largest market.

Playing into your competitors’ hands is never a bright move. But the City still has huge advantages, many of them safe from the ravages of Brexit. Good schools, cultural and sporting life, fine dining and even better shopping, the benefit of speaking English, and, of course, as Watkinson explains, London’s size creates a gravity of its own.

“It has a whole ecosystem,” she says. “It is not just particular pockets of expertise. It actually has the full range of professional and financial services. You can get everything you need in London and that does have a huge benefit for companies based here. The other point is that talent creates a centre of gravity, because when you have so many people based here and so many jobs here, it attracts people to it.”

So far London’s rivals have been limited to trying to poach specific markets, skills and trades. None has the size or depth of expertise that can seriously rival London on its own.

But that won’t stop them snapping at its heels, poaching jobs, attracting firms and changing the rules in their favour. Pilgrim says that will continue: “We saw movements to Dublin, Frankfurt and Luxembourg and those cities will want to keep building up their financial services industries, and the EU will want to build up its own infrastructure and be competitive. So I don’t think you can ever say one jurisdiction has won or we have reached the status quo.”

Wimbledonisation is fine, just so long as you are the only game in town. But everyone based themselves in London because it was the very best place in Europe to do business across Europe. Those firms had and have no loyalty or ties to the UK itself, while Brexit means rivals now find it easier to lure away those big players.

Which all means when there is a better game in another town, they can and will just go and play there.

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