Now that the EU has agreed to move Brexit negotiations on to a trade deal there will be much focus on financial services. An industry which produces annual revenues of £200 billion, accounts for 7 per cent of UK GDP and employs 1.1 million people is going to be a crucial part of any deal which Britain does with the EU, yet it is one to which other EU nations have long turned a greedy eye. In December, the House of Lords European Union Committee claimed that 75,000 jobs in financial services could be lost to other EU countries or to other countries. Not everyone, however, has been so pessimistic. In July accountants PWC and theCityUK, a group which represents City firms, claimed that Brexit could benefit the UK financial sector to the tune of £43 billion a year – assuming that the government took advantage of the opportunity to change the regulatory regime, and reformed the visa system to make it easier to employ talent.
These were the points of discussion at a lunch organised by the Spectator in association with Prudential. There is some evidence that there may already have been some decline in activity in the City. Reuters has compiled a list of indicators which it claims give early warning of trouble in the City of London. So far they have suggested a fall in City rents, yet a rise in new leases. They show a fall in footfall at Bank and Monument tube stations, a slowdown in passenger growth at London City Airport, a drop in financial jobs been advertised, yet a record opening of bars and restaurants in the City – suggesting that if there is anything wrong in the financial sector its members are determined to drown their sorrows.
City firms like to talk doom and gloom, says Kit Malthouse, MP for North West Hampshire and former London deputy mayor for business and enterprise, but their actions often point in a different direction – with Deutsche Bank and Bloomberg both announcing new HQs in London. “It is not a zero-sum game,” he says. “Banks are moving some jobs to Frankfurt yet they are still expecting UK operations to grow. Large businesses are always resistant to change, yet some of the same companies warning about Brexit also warned about the consequences of staying out of the Euro.”
For all the disruption caused by Brexit, there are also potential opportunities says Prudential’s Group Regulatory Director Julian Adams. It could allow the Treasury and the Bank of England to make changes to the EU’s Solvency 2 regulations, governing the amount of capital which must be maintained by insurers to guard against a crash. The measures were unduly harsh against British firms which have issued a lot of annuities – and Britain lost a battle in Brussels to address this.
Solvency 2 also makes life difficult for firms like Prudential who are competing in markets outside the EU, including the US and Asia, because its design was focused entirely on the European Single Market.
Immediately after the Brexit vote the biggest issue facing the City seemed to be that of maintaining ‘passporting’ – the system whereby financial institutions in one EU state can offer services across the bloc. But most City firms are now planning on the basis that passporting won’t continue. The Prudential’s fund management arm M&G, for example, has set up a subsidiary in Luxembourg which will be able to offer financial products across the EU. Many banks have done, or are in the process of doing, the same.
What is more concerning now, says Times columnist Iain Martin, is the effect of Brexit on the Euro currency trade. Although outside the Eurozone, Britain has been allowed to clear these trades, an activity which has ‘supercharged’ the City. The EU wants this trade for itself, but it will harm itself if it tries to push the business out of London.
“There is a much bigger revolution than Brexit coming in the shape of Fintech,” says Martin. “The City should be well-placed to take advantage of that because it is very innovative.” But will it need to employ so many people? The danger is we could end up with a booming City but whose wealth is trickling down much less than it is at present.
Much as the EU would love to snatch banking jobs from the City, they may well end up going instead to New York fears Baroness Lucy Neville-Rolfe. As Lord Desai says, no other city in the EU comes in the top 15 of global financial centres. But will the EU be able to see that its best interests lie with keeping London the world’s number one financial centre, or will it do what Lord Desai still believes Britain did in voting for Brexit, be determined to ‘self-harm’ – putting politics above economics?
There are encouraging signs, says Iain Martin. At the Brexit negotiations in early December, he says, “The European Commission was warned by German bankers that there is a lot at stake”. The negotiations could result in a more open deal between Britain and the EU on financial services than current EU rhetoric might suggest. Baroness Neville-Rolfe agrees. EU negotiators have a habit of taking things to the line. “When there was a prospect of Britain walking out of the Brexit talks in Brussels it really changed the temperature.”
One problem, says Julian Adams, is that the European Commission is preoccupied with its internal market – it is hard to get its attention about opportunities and dangers which lie beyond Europe. That may be so, but are we going to solve this problem by leaving – now that we have agreed to continued ‘regulatory alignment’ with the EU? The worry of John McTernan, former aide to Tony Blair and one of the champions of the banking industry in the Labour party, is that we will become a ‘rule-taker’ rather than a rule-maker. Wes Streeting, one of Labour’s members on the Treasury Select Committee, believes that in Britain we downplay the influence we have had in shaping the single market and that we may like even less an EU which is deprived of Britain’s ‘calming and sensible voice’.
There is also an issue, suggests John McTernan, with what happens regarding regulations which we do repatriate to Britain. Who is going to be making British regulations to replace EU ones? If we are not careful we could end up with overbearing British regulators in place of an overbearing Brussels. What the financial services industry should be doing, says Kit Malthouse, is to take the lead and produce a menu of the regulations it would like – rather than sitting by, waiting for the government to come up with proposals and then ‘marking its homework’.
Overall, there is a feeling of optimism – and in some quarters a sense that following December’s negotiations in Brussels the shape of Britain’s post-Brexit relationship with the EU is now much clearer. “The deal has been done,” says Lord Desai. “There will be no hard Brexit. The panic is over. I think house prices in London will now start rising.”
That prospect will not be met with universal rejoicing – but that is another debate.