It would be fanciful to think that the City of London has only sunlit uplands ahead. Finance was all but absent from December’s Brexit trade deal and the EU has so far resisted granting the UK “equivalent” regulatory status to aid market access. This week’s lurch of euro share trading from London to Paris, Amsterdam and Frankfurt was ominous — suggesting that the low tally of fewer than 10,000 jobs lost from the City so far could indeed rise towards earlier predictions of up to 75,000.
Yet there is room for optimism. It is useful to remember that many of the high times of the City of London predate 1973, when the UK joined the European Community. From the shipping and insurance boom that accompanied the establishment of Edward Lloyd’s coffee house in the 1680s to the founding of the Eurobond market in the 1960s, the City has always prospered through innovation.
It can do so again post-Brexit, but only if policymakers and financiers together establish the architecture to align the City with the broader economy and the greater good.
This year’s Cop26 climate conference presents an opportunity for the UK to cast itself as a world leader in green finance, vital to back a green energy revolution. Chancellor Rishi Sunak’s promise to issue green gilts was small and came later than other countries but is still a welcome building block.
Changes to regulations will be vital to bolster green finance. The same goes for efforts to boost infrastructure investment and to establish a credible venture capital sector to back start-ups in life sciences and technology — both traditional areas of weakness.
Life assurance and pension companies rightly complain that the EU’s Solvency II rules have been a powerful brake on the ability of UK institutions to back long-term projects, green or otherwise; foreign investors, notably the sovereign wealth funds of rich Asian and Middle Eastern nations, often fulfil that role instead.
Britain has toyed with the idea of creating a sovereign wealth fund of its own. This is both unnecessary and implausible, given the government’s funding deficit, £261bn at the last count. But the UK’s vast private pension system, worth more than £6tn on official figures, is six times the size of even the biggest sovereign wealth fund. Liberating it would be potent.
Carefully calibrated regulatory changes could give the City and the UK economy a boost with an approach that is robust but not dirigiste. A bonfire of financial regulation, however, would be unwise. Particular caution is needed with stock exchange listing rules amid strong lobbying for reform. Tech entrepreneurs like US-style dual class share structures, for example, but these are controversial with many investors.
If lax rules would be self-defeating, low taxes would not. Asian financial centres have been built on them. Even if some taxes must rise in coming years to pay for the Covid crisis, competitive corporate taxes would underpin the UK’s appeal to finance and business.
Compensating for lost business with the EU will be complicated. Incoming US president Joe Biden may seek to draw the west into multilateral hostility towards Beijing, blunting the opportunities to expand financial ties with China. Wall Street, with Mr Biden in the White House, will also be a stiffer competitor in green finance.
But the City still has significant opportunities. The last notable boom followed Margaret Thatcher’s Big Bang reforms of 1986. Unfettered, those freedoms produced a sometimes self-seeking City and fuelled the crash of 2008. A post-Brexit reset of rules must liberate and empower — but sustainably, in every sense of the word.