When speaking to 250 business leaders in a rah-rah Zoom call last week, Prime Minister Boris Johnson did his best to make up for past missteps. In 45 unrelenting minutes, he did everything possible to convince those in attendance that industries feeling neglected in the Brexit negotiations – particularly financial services – would be a future priority. Finance was a strategically important industry for the UK, he told them, and he was determined to defend it.
Those in attendance were too polite – or banned – to point out that, 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 shift in business to rival continental financial centers – notably Paris, Amsterdam and Frankfurt. London Stock Trading Volumes slumped in half.
Market experts expected this change. By law, much of this activity had to be relocated to comply with the Brussels Stock Trading Obligation, which requires EU investors to trade in EU stocks within the EU. But there were still whispers of shock in Westminster, according to major financiers.
The loss of business, while severe, is minimal in the context of the city as a whole. the € 6 billion in transactions is likely to represent less than £ 70million in revenue, compared to a trade surplus of $ 77 billion (£ 57 billion) for UK finance as a whole, according to lobby group CityUK. A similar argument has been made regarding the city’s wider loss of jobs to the EU following Brexit – estimated at less than 10,000, compared to previous forecasts up to 75,000.
What really matters is whether these are thin ends of bigger wedges. Certainly some of the city’s strengths are likely to endure. London’s dominance in the spot currency market, for example, is protected because it is not covered by the type of strict regulation that governs other business activities. The insurance market in London, whose global credentials date back to the 17th century, appears to be thriving, with losses from the pandemic pushing premium rates up. Two new insurers, Inigo and Conduit Re, have just launched in London.
But the highly regulated financial activity – the trading of stocks, bonds and derivatives of investment banks and asset managers – is undeniably at risk. Business and jobs will follow money.
Global banks are currently in discussions with EU regulators over the number and seniority of staff who will be based in EU financial centers instead of London. Bank of America, one of the few groups to have already established an important commercial operation on the continent, via a Paris office of 500 people, estimates that others will follow its model.
The asset managers that these banks serve are no different. Some London-based investment houses, which could have done 80% of their pan-European business from London, and only 20% in the field, are planning to move to a 50-50 split.
Some are still awaiting a much-hoped-for ‘equivalence’ deal between the UK and 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 Brexit policy. Even ardent lobbyists now seem to have given up on the prospect of EU-UK equivalence.
The perverse result could be that some activities in London, such as trading in derivatives, will in the future be routed through Chicago or New York, thanks to the EU’s equivalence agreement with the United States. The UK loses, even if the EU does not.
When the Brexit trade deal was struck on Christmas Eve, there was a lot of emphasis on the idea that it was a building block to support future collaboration. A protocol of agreement on financial services would follow in March. Potential equivalency agreements have been raised, but many financiers now believe the MoU will cover the exchange of regulatory data and information, but little more.
Mr Johnson’s henchmen and his enthusiastic demeanor downplay the importance of the change in stock trading and dismiss the prospect of mass job moves. “Global Britain” will find opportunities elsewhere anyway, they say, looking outward as the EU turns in on itself.
There are indeed areas of growth that could partially offset the decline in European business, including green finance, a clear policy priority the year the UK hosts the COP26 environmental summit, and financial technology. . The city has a long history of innovation and adaptive change. That’s just as well – clinging to the status quo is not an option.