From my apartment, I can see Canary Wharf spread out like the view of Lower Manhattan from Brooklyn Promenade. Until a year ago I used to tell Remainer friends that there were at least a dozen cranes hard at work, defying those who predicted the post-Brexit death of London as a financial centre. Today, I can see just one. I ventured into the City this morning. Leadenhall Market reminded me of the bleak Texas town in The Last Picture Show. Next week, there will be tumbleweed.
But it isn’t down to Brexit. It’s Covid. Die-hard Remainers don’t see it that way. For them, the City’s eerie quiet is vindication, proof that Brexit was a hammer blow to London’s financial prowess. It’s the same in Brussels, where there is a distinct whiff of anglophobia around. At the council level, that’s down to the French. At the commission, it is led by the Irish, particularly Mairead McGuinness, a Fine Gael politician who graduated from the European Parliament to be Financial Services Commissioner without any financial or economic background. Her deputy, John Berrigan, is a Brussels lifer. In the parliament it is practically everyone, thanks to David Cameron’s bone-headed decision in 2009 to pull the Tories out of the European People’s Party, the bloc of centre right parties in the European Parliament, to appease his backbenchers.
We don’t have many friends left in Brussels. That is going to make life difficult as we move from December’s Trade and Cooperation Agreement—which devoted fewer than four pages out of 1,250 to financial services—to negotiations on future relations between the City and the EU.
Between the referendum and the beginning of 2019, the City appeared to be winning. Out of a workforce of around 200,000, the City Corporation thought we had lost only around 10,000 jobs—and the Governor of the Bank of England recently reduced that estimate to 5,000-7,000. Sure, there had been a few high-profile defections. Goldman Sachs, for instance, moved its European base across the Channel (while leaving most of its staff in London). But everyone was talking about “workarounds”—finding ways to satisfy EU regulators by booking deals within the EU while keeping key decision-makers in London. But (and I say this with regret) that may no longer be enough. The Brit-bashers in Brussels are in charge, and their priority is political point-scoring.
There is a cost to that, for the EU27 at least as much as for the UK. The EU has rotten demographics, a social system it cannot afford, inflexible labour markets, and residual nationalism that is already undermining its €750bn Recovery Fund. That was why the Brits were able to push through the ambitious Capital Markets Union programme, now unfortunately tainted by the fact that it was so closely associated with London. There is nothing that the EU economy needs more than a deep, efficient and cost-effective capital market, and given that one already exists in London, that is where it should be. But ideologues don’t see it like that. They view financial services as a zero-sum game: what the UK loses, the EU must gain.
“It was clear before Covid that there would never be a single EU financial centre. For now, that seems a price the EU is willing to pay”
The problem is that finance is a touchy-feely business; it needs mass and it needs propinquity. London works because the City brings together bankers (retail, commercial, investment), asset managers, insurers, back-office specialists, venture capital and private equity firms, fintech start-ups, lawyers, accountants and actuaries. You name it, we have it. And, because we have it in bulk, it is more cost-efficient than having to pull together teams cross-border.
That’s an issue for the EU. Even before Covid blindsided us, it was clear that there would never be a single EU financial centre—and that Paris, Frankfurt, Amsterdam, Dublin, Luxembourg and even Madrid would fight tooth-and-nail for a bit of the business, offering everything from sweetheart personal tax deals (France, Ireland), corporate tax breaks (Ireland) and minimal regulation (Malta) to rental breaks (everywhere).
But, for the moment, this is a price our European friends seem willing to pay. Although the EU’s ambassador to the UK insists that “there is no punishment,” McGuinness has insisted that the EU will not allow itself to become “strategically dependent,” or “captured by a system we don’t regulate.”
This forms the background to negotiations that started in January on a memorandum of understanding on financial services between the EU and UK, with a goal of agreement by 31st March. It is important to understand what this memorandum both is and is not.
It is not a deal like the December trade deal. It won’t reinstate “passporting,” which is the right for UK firms to sell financial services cross-border within the EU27, and nor will it provide any assurance of regulatory equivalence. Last year, the UK unilaterally gave European firms a three-year promise that their national regulations would be deemed “equivalent” and that they could, therefore, operate in the UK. No reciprocal ruling came from the EU, though it has given broad-brush approval of regulatory equivalence to US firms. Even though, as of 1st January, UK regulations were identical to those of the EU, we only got an interim, time-limited ruling of equivalence for UK-based clearing houses and then only because, as the commission made clear, it was in the EU’s interest to do so.
What the memorandum will do is provide a “framework” for regulatory co-operation. This has been dismissed by some as little more than “a list of telephone numbers” to call if something goes wrong. It is more than that, or else John Glen, the minister in charge, and the two key civil servants, Katharine Braddick and Charles Roxburgh, wouldn’t be taking it so seriously. But the hard yards are still to come. Rishi Sunak has identified 40 areas where the UK would like a ruling of equivalence. In the present climate, there is no chance of that. It is worth remembering the two sides actually began to diverge from day one.
The hostility to London in Brussels will mean we cannot even get the sort of deal the EU gave to the US or Canada. This will force Britain to look to the rest of the world. After all, even though the EU27 is the largest market for UK financial services, it is by no means the fastest growing; that would be Asia. Nor is it where the UK’s closest financial links are; that would be New York. Even a committed European like Kay Swinburne, a former vice-chair of the European Parliament’s ECON Committee, is, therefore, advocating a couple of regulatory tweaks in the UK that would (undoubtedly) prompt squawks in Brussels. One is a review of the tax treatment of investment funds domiciled in Britain, which could undermine the attractiveness of Dublin and Luxembourg. The other is a rewrite of the Overseas Persons Exemption to encourage those who can do business anywhere to do it in the UK.
As for the EU, all its directives are subject to periodic review, in some cases almost before the ink is dry. That includes highly contentious bits of legislation like the Markets in Financial Instruments Directive and the Alternative Investment Fund Managers Directive, and it means that the two sides are already starting to drift apart, even in areas where regulation was formally identical on 1st January.
Could there be a happy ending? Most observers, including senior City figures who were active in the Remain campaign, like our former commissioner, Jonathan Hill, say “yes,” but only after a pretty painful transition. Maybe Glen et al will be able to use the negotiations on a memorandum to build better relations with the EU’s banking and finance department, and also the European Parliament, both of which seem, at present, implacably hostile. Maybe they will be able to convince them that it makes no sense for the EU to build five separate financial centres when there already exists an established core of expertise across the Channel—but we shouldn’t bank on it.
Still, all is not lost. The success of the City of London as an international financial centre predated the EU’s single market. It came about partly as an unintended consequence of ill-thought--out US legislation (the Interest Equalisation Act of 1963) and partly because of US efforts to block the assets of Soviet-era banks like Moscow Narodny. But even more so, it was because the UK’s financial regulation was essentially permissive, while that across the Channel was suspicious, hostile and narrowly chauvinistic. The result was that non-Brits like Michael von Clemm, Stani Yassukovich and Minos Zombanakis came here in preference to continental centres, and built a financial infrastructure that exists nowhere else in the world, not even in New York, and certainly not in Frankfurt or Paris. Today, their successors, in the fintech area in particular, are already here. We need to point them in the right direction—and it may not be towards the EU.
This article is featured in Prospect’s new “The Road to Recovery” report, published in partnership with Lloyds Banking Group, the Government of Jersey and Jersey Finance. Read the full report PDF here.
