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Brexit can mean London loses even if the EU doesn’t gain

When he addressed 250 business leaders on a rah-rah Zoom call last week, Prime Minister Boris Johnson did his best to make up for past missteps. In a relentlessly upbeat 45 minutes, he went out of his way to convince those present that business sectors feeling neglected in the Brexit negotiations — particularly financial services — would be a future priority. Finance was an industry of strategic importance for the UK, he told them, and he was determined to champion it.

Those in attendance were too polite — or not allowed — to point out that, only a couple of days earlier, the City of London had suffered a dramatic blow from Brexit. On the first trading day of the year, there had been a huge swing of business to rival continental financial centres — notably Paris, Amsterdam and Frankfurt. London’s equities trading volumes slumped by a half.

Markets experts had expected the shift. By law, a large chunk of that business had to move to comply with Brussels’ share trading obligation, which forces EU investors to trade EU stocks within the EU. But there were still whispers of shock in Westminster, according to senior financiers.

The loss of business, while stark, is minimal in the context of the City overall. The €6bn-worth of trades probably represents revenue of less than £70m, compared with a $77bn (£57bn) trade surplus for UK finance overall, according The CityUK lobby group. A similar argument has been made about the broader loss of City jobs to the EU as a result of Brexit — estimated at fewer than 10,000, compared with earlier forecasts of up to 75,000.

What really matters is whether these are thin ends of bigger wedges. Granted, some of the City’s strengths are likely to endure. London’s dominance of the spot currencies market, for example, is shielded as it is not covered by the kind of strict regulations that govern other trading activity. The London insurance market, whose global credentials stretch back to the 17th century, appears to be thriving, with pandemic-related losses pushing up premium rates. Two new insurers, Inigo and Conduit Re, have just launched in London.

But highly regulated financial activity — the shares, bonds and derivatives trading of investment banks and asset managers — is undeniably at risk. Business and jobs will follow the money.

Global banks are in ongoing discussions with EU regulators over the number and seniority of staff that will be based in EU financial centres instead of London. Bank of America, one of the few groups to have already established a significant trading operation on the continent, via a 500-person Paris office, believes others will follow its model.

The asset managers that those banks serve are no different. Some London-based investment houses that might have done 80 per cent of their pan-European business from London, and only 20 per cent on the ground, foresee that moving to a 50-50 split.

Some still pine for a long hoped-for UK “equivalence” deal with the EU authorities, allowing smooth mutual market access. Logically, given that their rules are currently almost identical, Brussels should grant the UK such recognition, echoing similar EU deals with other nations. But that ignores the politics of Brexit. Even ardent lobbyists appear now to have given up on the prospect of EU-UK equivalence.

The perverse outcome may be that some London activity, such as derivatives trading, is in future routed through Chicago or New York, thanks to the EU’s equivalence deal with the US. The UK loses, even if the EU does not gain.

When the Brexit trade deal was struck on Christmas Eve, much was made of the idea that this was a building block to support further collaboration. A memorandum of understanding on financial services would follow by March. Potential equivalence agreements were alluded to but many financiers now reckon the MOU will cover the exchange of data and regulatory information but little more.

Acolytes of Mr Johnson and his gung ho attitude play down the significance of the share trading switch and dismiss the prospect of mass job moves. “Global Britain” will in any case find opportunities elsewhere, they say, looking outwards as the EU turns in on itself.

There are indeed areas of growth that may partially offset the decline in European business, including green finance, an obvious political priority in the year the UK hosts the COP26 environment summit, and financial technology. The City has a long history of innovation and adaptive change. That is just as well — clinging to the status quo is not an option.

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This article was first published at https://www.ft.com/content/d8b906cb-2747-48d1-99e6-4720c573e08a

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The Markets Today