oris Johnson had a familiar shtick for bankers when he was Mayor.
He’d turn up as keynote speaker at City dinners, late and dishevelled, pretend he wasn’t sure which event he was at, then lovebomb the audience with how brilliant they and their world-beating financial services were. The audience would cheer him to the rafters, even if they’d seen him perform the same trick time and again.
What a difference a referendum makes.
Since he returned to frontline politics and switched to the Brexit camp, he’s left the City alone and unloved to fend for itself. Remember “f*ck business”?
Instead, he focused on delivering a hard exit from the EU that would pacify his rightwing backbenchers at any cost.
Rather than negotiate a Brexit deal to safeguard the UK’s biggest industry – which employs one in every 14 British people – he left financial services out of the talks altogether while he focused on fish.
All this is old news for the City. Bankers, fund managers and brokers could tell they’d be left out in the cold years ago. The writing was on the wall when the doomed Chequers agreement in 2018 said they’d be losing the efficient access to Europe they’d enjoyed for decades. They made plans accordingly, shifting operations to the EU where it was deemed necessary for business to continue.
So, it was with bemusement that they heard some ministers were shocked that 6 billion Euros of daily share trading moved from London to the EU on Brexit’s Day One last Monday.
Pre-Brexit, London’s world beating stock market system handled about a third of all trading of European investors’ EU shares (think: Santander, Siemens or Volkswagen). Given London’s dominance of global share trading, it made life simpler for continental traders to use London firms as a one-stop shop for all their deals.
But from last week, those euro-denominated shares have to be bought and sold on the continent. As Alasdair Haynes, chief executive of the Aquis stock exchange, puts it: “The City has lost its European share business.”
It’s no great loss of tax revenue to the Exchequer, as the stamp duty was always paid locally, but in terms of the City’s “soft power” and international kudos, it wasn’t a good look.
City types – largely a Remain bunch – were astonished at Westminster’s astonishment.
“Why the surprise?” says one. “This was what they’d made happen. They did this!”
As the government knew full well, Britain’s financial services players lost their “passport” to trade in the EU on January 1st.
Forgoing billions of pounds of business, not to mention kudos, was the inevitable result. Johnson and his Chancellor Rishi Sunak admit the Brexit deal was a disappointment on financial services.
To quote Johnson’s uncharacteristic understatement, the Brexit agreement “does not go as far as we would like”. They are now trying to turn the charm onto the City again.
Sunak claims Brexit will unleash a “Big Bang 2.0” – a reference to the boom that followed Margaret Thatcher’s deregulation of the industry in the 1980s.
He and the PM hosed the godfathers of the City and business with love and enthusiasm on a private Zoom call last week, declaring Brexit would mean a great leap forward in swashbuckling, exporting, wealth creation.
But while they were big on gusto, substance was somewhat lacking, according to two of those present.
This week, the UK and EU started talks to set out some basics on how we’ll trade with each other in the future. Those rules, known as memorandums of understanding, will be vague at best. More important will be the negotiations to follow on which UK rules and regs the EU deem are compatible with their own, and from that, which services from London the EU will permit to continue.
It’s a concept known as “equivalence” and is seen by many as key to forging business links for future decades. In an ideal world, such agreements would be made on purely technical grounds; if our rules are the same as yours, let us continue to trade as before.
But bankers aren’t holding their breath. They do deals every day, and in this one, they can see the EU holds all the cards.
Says one: “Why should they grant us equivalence when it’s in their interests not to? We all know France wants to build up its own finance sector, so why would they pass on the chance now to put blocks in our way? This is – and was always going to be – political, not technical.”
The EU would only grant equivalence if Britain agrees to make sacrifices elsewhere, and that could end up ham-tying Britain’s efforts to expand its trading in other areas – turning Sunak’s Big Bang into a small whimper.
That’s a danger the Governor of the Bank of England, Andrew Bailey, is acutely aware of. He warned this week that Britain must not negotiate itself into a place where the City has to accept whatever rules the EU throws at it just to maintain equivalence. “I strongly recommend that we don’t become a rule-taker,” he said. If the price of that was no equivalence, then so be it.
It could be that the EU takes a more relaxed view about allowing UK access to its markets. As one banker points out, the consolidation of expertise and capital in London means our services are far cheaper for Europeans than if they built up their own duplicates.
With Covid devastating their economies, more expensive overheads are the last thing EU employers need.
But with history teaching them politics overrides logic when it comes to Brexit, you won’t find many bankers expecting much joy from the equivalence talks.
Instead, they moved on long ago to trying to find new ways to make up from sacrificing a chunk of the 30% or so of UK financial exports that hitherto went to Europe.
Financial technology is one area where they hope to thrive. Thanks to its mix of major investment nous and world-leading universities between London, Oxford and Cambridge, the City leads the world already in “fintech”. It’s no accident that the likes of digital banks Monzo and Revolut are based here.
Green investing is another. Again, the stars are aligned over London. The world’s wealthy want to invest in more ethically sound products, while Britain has a leading position in climate change targets. The cherry on the cake for this Brexit year is that Britain is hosting the 2021 Climate Change Conference.
Johnson and Sunak have signalled that Britain will issue billions of pounds of green government bonds this year to fund renewable energy projects. UK taxpayers will be able to capitalise on the super low interest rates currently available, but the happy by-product will be plenty of opportunities for London bankers to hone their expertise before offering the same products to other countries around the world.
Asia is seen as another major market for the City to aim for. London is already a big supplier of financial products to the region’s burgeoning middle class, but the loss of EU business will make that a bigger prize than ever. If, that is, we can dance around the aggressive ambitions of China in the region.
And there’s another way the City needs the government’s help to thrive post-Brexit. A loud group of Conservative voices – ironically often of a Brexiteer hue such as Lord (William) Hague of Richmond – have been demanding tougher action from London against Beijing.
Privately, bankers wish the Prime Minister would pay them less heed. Says one: “Is it not possible for the UK to maintain its integrity and push back against what we don’t like, while also growing our share of trade with these countries?”
The biggest threat is that Brexit begins to see the EU chip away at the ecosystem in which its banks, brokers, lawyers and accountants exist. The beating heart of that is the trillions of pounds that rest here, in pension funds, hedge funds, and wealthy family money.
It’s not just Frankfurt, Paris and Dublin that want it. New York and Singapore are fierce competitors, so we must not be complacent.
Miles Celic, head of the lobby group TheCityUK, said: “The UK remains a world-leading international financial centre. Its ecosystem of skills draws in clients from around the world. Its future will rely on the UK remaining open, outward-looking and continuing to be one of the most globally competitive and attractive places to do business.”
Britain’s financial services are far more heavily regulated than those rival centres, some in the industry say. The Bank of England has, they claim, gone too far in the direction of “safety first” after having had too lax rules before the financial crisis.
If Britain is to thrive away from the EU, some of those rules may have to be watered down. Besides, as is usually the way of regulation, most of them are designed to prevent the last crisis, rather than looking to avoid the next one. Regulating in the rear-view mirror.
British banks have to hold more capital than their peers abroad, they say, making it more expensive for them to trade here; they are strangled with red tape, and are taxed more highly than practically anywhere. And don’t get them on the subject of bonus caps.
As Johnson begins his charm campaign of the City, he must release the straitjacket a bit to let them thrive.
As one says: “They can’t keep saying, we love you for your taxes, but we hate you for what you did in the past. It’s time they remembered, we have other options.”
How France is trying to steal London’s business
Nobody is more eager to lure bankers and businessmen away from London than Paris.
President Emanuel Macron has declared he wants to make Paris “the leading financial centre” for Europe, with Brexit being the spur to his ambitions.
He has vowed to make life easy for British and American financiers in his country, even offering full English language documentation – a massive concession for a country so linguistically proud that some still wince at the word “le sandwich.”
Every year since the Referendum, the French government has rolled out the red carpet for international bankers at its “Choose France” event.
Macron wines and dines the business world’s grandes fromages at the Palace of Versailles to flatter and cajole into moving their businesses to Paris.
Says one attendee: “From there, we go on to Davos. And I always wonder, when is London going to take me somewhere nice like that?”
Another, who has moved some staff to Paris already, says: “The French Ministry of Finance is like our concierge service. We had difficulties getting visas for five of our top bankers recently. We phoned these guys up and it was fixed in an instant – including invitations for their wives. If that was in Britain, we wouldn’t even know who to call.”
Goldman Sachs has moved some staff, there, as have HSBC and Barclays.
So far, though, the numbers have been small.
Some snigger that Macron’s attempts look desperate, while others point out that France has a decades-old, leftwing mistrust of bankers.
Macron, a former Rothschild man himself, may welcome them. But, in this election year, who’s to say what his successor might do?
::2.3 million people work in financial and related professional services
::£10.50 in every £100 of UK tax to the Chancellor comes from financial services, or 42% of the health service budget.
::£200.5 billion was the City’s contribution to Britain’s economy, representing £10 in every £100 of UK economic output